The yen's weakening against the U.S. dollar from the 103.00 level that began in 2021 appears to have continued into 2022 as well. In early January, the USD/JPY exchange rate is approaching the 116 yen per dollar level.
The Japanese yen weakened to a 5-year low against the USD due to a possible overall strengthening of the dollar as investors stepped up bets on an early interest rate hike by the Federal Reserve.
The yen resumed its downward trend against the dollar in 2022 after a 10 percent decline the previous year as the economic situation and monetary policy of Japan and the U.S. still appear to diverge.
Japanese not worried about inflation
The Fed has signaled a willingness to tighten monetary policy this year. The Bank of Japan, on the other hand, appears likely to keep its monetary easing policy unchanged. Japan is entering its 10th year of unprecedented ultra-loose monetary policy. Inflation there has remained relatively low and well below the central bank's 2 percent target, which may reinforce the view that the Bank of Japan will lag other central banks in reducing monetary stimulus. It also appears that the omicron option may not have much impact on the economic recovery, which in turn may have increased risk appetite, further pulling investors away from the safe haven that is the yen in the financial market.
Meanwhile, the aforementioned Fed may raise interest rates as much as three times this year, at least according to interest rate futures quotes. Yields on U.S. Treasury bonds also began to rise. Yields on 2-year bonds exceeded 0.8 per cent, while yields on 10-year bonds rose to 1.6 per cent, making them more attractive to foreign investors, which could also lead to a broader appreciation of the USD against other currencies.
Important data from the US labour market
This week, one of the key reports with the potential to influence the Fed's monetary policy may be Friday's reading of data from the US labor market. In an environment of elevated inflation, wage growth data may also be key. They may indicate whether we are entering a wage-price spiral or an economic slowdown caused by weak wage growth and declining real disposable income of households in the world's largest consumer, i.e. the United States.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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