FX.co ★ The Yen Maintains Its Course Toward Strengthening Against the Dollar

The Japanese yen rose against the U.S. dollar yesterday following weak data related to the U.S. labor market, which only increased the likelihood of a widening divergence in monetary policy approaches between the U.S. and Japanese central banks.

Today, Bank of Japan Governor Kazuo Ueda delivered a speech in which he stated that the regulator can only broadly estimate where the so-called neutral interest rate might lie. The statement came amid growing expectations that the Bank of Japan may raise interest rates this month.

"As for the neutral interest rate, unfortunately, it remains a concept that at the moment can only be assessed within a fairly wide range," Ueda said in parliament on Thursday. "We do not know what it will be, but that will determine how much nominal interest rates ultimately rise and how appropriate that will be."

It is worth noting that the neutral rate is the level at which policy settings are considered neither restrictive nor stimulative. Ueda's description of this rate as difficult to define implies that the Bank of Japan has considerable room for economic growth before it raises rates to a level that may cease to be stimulative.

Despite Ueda's cautious tone, his remarks were interpreted as a hint that the Bank of Japan does not rule out raising rates in the near future. Recall that earlier this week, Ueda gave the clearest indication yet of a potential rate hike in line with the Bank of Japan's December 19 decision. "The central bank will weigh all the pros and cons of a rate increase and make appropriate decisions," he said at the time, after analyzing the economy, inflation, and financial markets domestically and abroad.

These comments sharply increased market expectations of an upcoming rate hike. Overnight swaps now point to an 80% or higher probability of a December hike, compared to about 58% at the end of last week.

Following Ueda's latest statements, the yen strengthened to 155.47 per dollar, although overall yen weakness persists, which may intensify inflationary pressures due to rising import costs. The bank's core inflation measure has remained at or above the 2% target for three and a half years. To ease the burden on households, Prime Minister Sanae Takaichi announced an economic stimulus package last month. However, its impact on the underlying inflation trend remains unclear.

As for the current USD/JPY technical picture, buyers need to take control above the nearest resistance at 155.70. This will allow them to target 156.10, above which breaking through will be quite difficult. The most distant target is the 156.70 level. In the event of a decline, the bears will attempt to take control of 155.40. If they succeed, a breakout of this range will deal a serious blow to the bulls' positions and push USD/JPY toward the 155.05 low with the prospect of reaching 154.70.