Japanese Yen Rises on Strong Wage Growth Amid Fed Rate Cut Anticipation

The Japanese Yen (JPY) gained momentum at the start of the week, driven by robust wage growth data that bolstered expectations for an interest rate hike by the Bank of Japan (BoJ). On Friday, the Yen reached its highest level against the US Dollar (USD) since November 14, reflecting a market response to Japan’s economic indicators.

Japan’s latest wage growth figures revealed a notable 2.6% year-on-year increase in nominal wages for October, surpassing expectations of 2.2%. This rise marked the strongest wage growth in three months, reinforcing market speculation that the BoJ may implement a rate hike in their upcoming December meeting. Despite this positive news, inflation-adjusted real wages declined for the tenth consecutive month, shrinking by 0.7% due to a 3.4% rise in consumer prices.

Investor sentiment appeared undeterred by the downward revision of Japan’s Q3 GDP, which indicated a contraction of 0.6% compared to the initial estimate of 0.4%. The revised figures showed Japan’s economy contracted at its fastest pace since Q3 2023, falling 2.3% year-on-year, missing forecasts and raising concerns about the economic outlook.

Nevertheless, analysts believe the increase in wages will enhance household purchasing power, potentially boosting consumer spending and driving demand-driven inflation. This perspective aligns with comments from BoJ Governor Kazuo Ueda, who noted that the likelihood of meeting economic and price projections is improving. Additionally, Prime Minister Sanae Takaichi‘s reflationary policies and significant spending plans have lifted the benchmark 10-year Japanese government bond yield to its highest level since 2007.

The strengthening of the Yen is also supported by a cautious market mood, enhancing its appeal as a safe-haven asset amidst global economic uncertainties. The narrowing of the interest rate differential between Japan and other major economies is another factor favoring the lower-yielding Yen.

In contrast, the USD remains under pressure, languishing near its lowest level since late October. Traders are anticipating a near 90% probability that the US Federal Reserve will announce a rate cut during its meeting on Wednesday. This expectation has contributed to the USD’s decline, impacting the USD/JPY exchange rate during the Asian trading session.

As the USD/JPY pair struggles to regain traction above the 100-hour Simple Moving Average, technical indicators suggest a bearish outlook. The pair may find support around Friday’s swing low near 154.35, with potential further declines towards the 154.00 mark. Conversely, any recovery attempts are likely to encounter significant resistance near 155.35.

The focus now shifts to the Federal Reserve’s updated economic projections and comments from Chair Jerome Powell following the meeting, which could provide further directional cues for the USD and its impact on the USD/JPY pair. Investors remain cautious, awaiting clarity on the Fed’s rate-cut trajectory before making aggressive moves.