Japanese Yen sits near multi-month top against USD amid divergent BoJ-Fed expectations

• The Japanese Yen continues to draw support from bets for more BoJ rate hikes.
• The narrowing US-Japan rate differential further benefits the lower-yielding JPY. 
• Expectations that the Fed will resume its rate-cutting cycle undermine the USD.

The Japanese Yen (JPY) attracts fresh buyers at the start of a new week and moves back closer to its highest level since October touched against a broadly weaker US Dollar (USD) on Friday. Data released during the Asian session on Monday showed that the base pay in Japan surged to a 32-year high in January, while real cash earnings fell 1.8% on the back of persistent inflation. This comes on top of a growing confidence that bumper wage hikes seen last year will continue this year and backs the case for further interest rate hikes by the Bank of Japan (BoJ), which, in turn, is seen underpinning the JPY.

Meanwhile, hawkish BoJ expectations continue to push Japanese government bond (JGB) yields higher. The resultant narrowing of the rate differential in Japan and other countries turn out to be another factor driving flows towards the lower-yielding JPY. The USD, on the other hand, languishes near a multi-month low amid rising bets that the Federal Reserve (Fed) will cut interest rates multiple times this year, bolstered by weaker US jobs report on Friday. This contributes to the offered tone surrounding the USD/JPY pair and supports prospects for a further near-term depreciating move. 

Japanese Yen is underpinned by hawkish BoJ expectations

• Japan’s labor ministry reported Monday that Base pay rose by 3.1% in January from a year earlier – representing the largest advance since October 1992. Additional details revealed that growth in nominal wages slowed from 4.4% in December to 2.8% – marking the lowest reading in three months.
• Meanwhile, real cash earnings ended two straight months of gains and fell 1.8% in January, reflecting the impact of persistent inflation. This, along with expectations that another substantial pay hike in Japan will fuel demand-driven inflation, should allow the Bank of Japan to hike interest rates further. 
• Japan’s UA Zensen – a labour union group representing retail, restaurant, and other industry unions – said that its member unions are seeking an average wage hike of 6.11% for their full-time employees in the 2025 wage negotiations. For part-time workers, wage increases asked for averaged at 7.16%.
• The yield on the benchmark 10-year Japanese government bond rose to its highest level since June 2009 and provided a fresh lift to the Japanese Yen during the Asian session on Monday. Apart from this, the prevalent US Dollar selling bias drags the USD/JPY pair back closer to the 147.00 round figure. 
• The USD languishes near a multi-month low touched in reaction to weaker US employment details on Friday, which suggested that the labor market in the world’s largest economy slowed in February. The headline Nonfarm Payrolls showed that the economy added 151K jobs in February vs. the 160K forecast.
• Adding to this, the previous month’s reading was revised down to 125K from 143K reported originally. This was accompanied by an unexpected uptick in the Unemployment Rate to 4.1% and overshadowed by a rise in the Average Hourly Earnings to 4% from 3.9% in January (revised from 4.1%).
• This comes amid worries that the uncertainty over US President Donald Trump’s trade policies could slow economic activity in the US and force the Federal Reserve to resume its rate-cutting cycle in June. Moreover, traders are pricing in about three rate cuts of 25 basis points each this year. 
• Fed Chair Jerome Powell said on Friday that the US central bank can maintain policy restraint for longer if inflation progress stalls or eases if the labor market unexpectedly weakens or inflation falls more than expected. This, however, does little to lend any support to the USD or the USD/JPY pair. 
• Trump took another pivot on his tariff agenda and said that impending tariffs on Canada may or may not come on Monday, or on Tuesday. This comes hours after the Trump administration temporarily waived tariffs on goods that comply with the US–Mexico–Canada Agreement for a month. 
• Furthermore, US Commerce Secretary Howard Lutnick said late Sunday that the 25% tariffs on steel and aluminum imports, set to take effect on Wednesday, are unlikely to be postponed. This keeps investors on the edge, underpinning the safe-haven JPY and weighing on the USD/JPY pair. 

USD/JPY bears are awaiting a break below the 147.00 mark

From a technical perspective, a sustained break and acceptance below the 147.00 mark would be seen as a fresh trigger for the USD/JPY bears and set the stage for an extension of a two-month-old downtrend. That said, the Relative Strength Index (RSI) on the daily chart is on the verge of breaking into oversold territory. Hence, it will be prudent to wait for some near-term consolidation or a modest bounce before positioning for any further depreciation. 

Nevertheless, the USD/JPY pair seems vulnerable to weakening further below the 146.50 intermediate support and testing the 146.00 round figure. Some follow-through selling should pave the way for a fall towards the 145.25-145.20 zone en route to the 145.00 psychological mark and the next relevant support near the 144.80-144.75 region. 

On the flip side, an attempted recovery might now confront stiff resistance near the 148.00 mark. Any further move up might be seen as a selling opportunity and remain capped near the 148.65-148.70 region. A sustained strength beyond the latter, however, could trigger a short-covering rally and lift the USD/JPY pair above the 149.00 mark, towards the 149.80-149.85 area en route to the 150.00 psychological mark and the 150.35-150.40 supply zone.