5th December 2024 The Japanese yen has softened after reaching recent highs, weighed down by uncertainty surrounding the Bank of Japan’s (BoJ) potential interest rate hike. While Governor Kazuo Ueda has hinted at the possibility of an imminent rate adjustment, some doubts persist over whether the move will occur at this month’s meeting. This uncertainty has contributed to bearish momentum for the yen, reflecting a cautious tone in currency markets.

Economic data, however, hints at underlying resilience in Japan’s economy. November’s Jibun Bank Services PMI exceeded expectations, rebounding from a four-month low due to rising orders and a strong labor market. Inflationary pressures remain elevated, driven by persistent increases in production costs, which strengthen the case for monetary tightening by the BoJ. These factors could provide medium-term support for the yen if the BoJ adopts a firmer stance on rate hikes.

Meanwhile, escalating risks in the Middle East and political uncertainty in France and South Korea could support demand for the yen. However, diverging yield trends weigh on the currency in the near term. While Japanese yields remain mostly subdued, rising U.S. Treasury yields, coupled with robust U.S. economic performance and a less dovish tone from Federal Reserve Chair Powell, are likely to sustain dollar strength, keeping pressure on the yen.