Today Markets Analysis: The Japanese yen weakened past 155 per dollar on Wednesday, extending its decline for a third consecutive session as traders positioned for an expected Federal Reserve rate hike. A stronger US dollar has increased pressure on the yen, while higher oil prices are adding another headwind by raising energy import costs for Japan.

However, the yen’s decline is being countered by growing expectations that the Bank of Japan could accelerate policy tightening, alongside renewed intervention risks and the prospect of greater capital repatriation by Japanese investors.

Yen Extends Three-Session Decline

USD/JPY has moved above 155, with the dollar benefiting from expectations surrounding the Federal Reserve’s upcoming decision.

The immediate rate differential remains a key driver. If the Fed maintains a relatively hawkish outlook while the BoJ moves more cautiously, the interest-rate gap can continue to favour the dollar.

For the yen, however, the market is increasingly focused on whether Japanese policymakers are prepared to respond to renewed currency weakness.

Bullish Sentiment

Several factors could provide support for the yen despite its recent decline.

• BoJ tightening expectations: Markets are pricing roughly an 80% probability of a BoJ rate hike on Friday.
• Further hike expectations: Another increase is currently expected by the end of January.
• Intervention risk: Recent joint interventions by Tokyo and Washington reinforce the possibility of official action if yen weakness becomes disorderly.
• Capital repatriation: Greater repatriation by Japanese investors could increase demand for the domestic currency.
• Strong exports: August exports increased more than expected, supported by demand for AI-related chips.

Bearish Sentiment

The yen continues to face several significant pressures.

• US dollar strength: Expectations of a Federal Reserve rate increase are supporting the dollar.
• Higher oil prices: Japan’s reliance on imported energy means rising crude prices can increase its import bill and weigh on the yen.
• Policy uncertainty: Although a BoJ hike is increasingly expected, the pace of subsequent tightening remains uncertain.
• Middle East disruption: Supply-chain and energy-market disruptions could increase Japan’s import costs further.
• Yield differential: A persistent gap between US and Japanese interest rates can continue to favour dollar demand.

Oil Prices Add Pressure to Japan’s Trade Balance

The renewed rise in oil prices is particularly important for the yen.

Japan is heavily dependent on imported energy, meaning higher crude prices can increase the country’s import costs and demand for foreign currency. This creates an additional fundamental headwind for the yen at a time when USD/JPY is already being driven higher by US monetary-policy expectations.

If energy prices remain elevated, the impact on Japan’s trade and current-account dynamics will remain an important consideration for yen traders.

BoJ Rate Decision Becomes the Critical Catalyst

Markets are currently pricing around an 80% probability of a BoJ rate hike on Friday, making the central bank’s decision a major event for USD/JPY.

The size and tone of the decision will be important, but so will the guidance on future policy. A clear signal that additional tightening is likely could strengthen expectations for a narrowing US-Japan rate differential.

Conversely, a cautious BoJ message could limit the yen’s ability to recover from its recent losses.

Japanese Exports Provide a Counterweight

Japan’s August exports rose more than expected, with strong demand for AI-related chips helping offset ongoing supply disruptions linked to the Middle East conflict.

The export performance provides a more constructive signal for Japan’s external sector, although traders will need to assess whether the strength can persist if global trade conditions deteriorate.

For the yen, stronger export receipts can provide some support through increased foreign-currency conversion into domestic currency.

What Traders Are Watching Next

The main focus is now the Federal Reserve decision followed by the Bank of Japan meeting on Friday.

Traders will watch the Fed’s updated projections and guidance alongside the BoJ’s rate decision and communication. The interaction between US and Japanese monetary policy could determine whether USD/JPY remains above 155 or begins to retrace its recent advance.

Oil prices and any signs of official currency intervention will also remain important secondary drivers.

Currency Hedger View

For businesses exposed to USD/JPY, the current environment combines currency volatility with a significant energy-price risk.

Japanese importers can face additional pressure when the yen weakens at the same time as oil prices rise, increasing the domestic-currency cost of imported energy. Exporters, meanwhile, may benefit from a weaker yen but face greater uncertainty if BoJ tightening or intervention changes the exchange-rate trend.

Currency Hedger — www.currencyhedger.com

Market analysis contributed by Currency Hedger, an Octalas Group division specialising in foreign exchange, currency risk and hedging.

Today Markets View

The yen remains under pressure above 155 per dollar, but the fundamental picture is becoming increasingly two-sided.

US monetary policy is supporting the dollar, while higher oil prices are creating another headwind for Japan. Against that, rising BoJ tightening expectations, intervention risk and stronger export demand could limit further yen weakness.

“USD/JPY is being pulled in opposite directions. US rate expectations and higher energy costs are keeping pressure on the yen, but an increasingly credible BoJ tightening path raises the risk that the current dollar advance faces stronger resistance.” — Louis Roche, Analyst, Today Markets

Bottom Line

The yen has fallen for a third consecutive session, moving beyond 155 per dollar as the US dollar strengthens ahead of the Federal Reserve decision.

The bullish case for the yen rests on rising BoJ hike expectations, potential intervention and stronger Japanese export demand. The bearish case remains centred on US dollar strength, elevated oil prices and the continuing US-Japan yield differential.

With the Fed decision and BoJ meeting arriving in close succession, monetary-policy divergence will remain the central driver for USD/JPY.

Analysis by Louis Roche, Analyst, Today Markets

Market analysis contributed by Currency Hedger, an Octalas Group division specialising in foreign exchange, currency risk and hedging.