The Japanese yen lost ground against the US dollar on Friday, December 26, as market participants remained vigilant for any signs of official intervention from Tokyo to support the currency. The greenback also posted modest gains against the euro during a trading session marked by thin volumes.
BOJ Rate Hike Fails to Prop Up Yen
Despite the Bank of Japan's recent decision to raise interest rates, the yen has continued to struggle. Analysts point to persistent concerns over Japan's expansive fiscal policy as a key headwind for the currency. Adding to these worries, the Japanese government proposed a record budget for the next fiscal year on Friday. While the plan aims to curb new debt issuance, it highlights the difficult balancing act for Prime Minister Sanae Takaichi: stimulating economic growth while inflation persists above the central bank's target.
Data released on Friday showed core consumer inflation in Tokyo slowed in December. The moderation was driven by easing cost pressures for food items. However, the inflation rate remained firmly above the Bank of Japan's 2% target, strengthening the argument for further interest rate increases in the future.
Officials Issue Strong Intervention Warnings
Bank of Japan Governor Kazuo Ueda set the stage on Thursday, stating that the nation's underlying inflation is gradually accelerating and steadily approaching the 2% target. He reiterated the central bank's readiness to continue raising interest rates. More pointedly, Japanese authorities have ramped up their verbal warnings to support the yen.
Finance Minister Satsuki Katayama delivered the strongest warning yet on Tuesday, stating that Japan has a "free hand" to deal with excessive currency moves. This clear signal of Tokyo's readiness to intervene in the forex market has helped the yen recover from its recent lows, though selling pressure resumed on Friday.
Forex Market Movements
In specific trading action, the US dollar was last up 0.48% against the yen, trading at 156.54. This level is below the recent high of 157.77 reached the previous Friday. The broader dollar index, which measures the greenback against a basket of major currencies including the yen and euro, edged up 0.01% to 98.04.
The euro dipped 0.04% against the dollar to $1.1772. The British pound sterling also fell, declining 0.22% to $1.3493. The US dollar has faced general weakness this year as investors anticipate further interest rate cuts from the Federal Reserve in 2025, while other major central banks are expected to hold steady.
Federal Reserve officials are currently weighing a softening labor market against ongoing inflation concerns, with price increases still running above the Fed's own 2% annual target. Market pricing, as seen in Fed funds futures, indicates traders are expecting between two and three 25-basis-point rate cuts next year, potentially starting as early as March.
In the cryptocurrency market, bitcoin saw a slight decline, falling 0.58% to $87,340.
