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The Japanese yen strengthened to a six-week high against the dollar, marking its strongest weekly performance since late July.
This notable appreciation is largely attributed to hotter-than-expected inflation data, which has raised expectations for a potential interest rate hike by the Bank of Japan (BoJ) in December.
November’s Tokyo core consumer price index (CPI) rose 2.2% year-on-year, surpassing market expectations and accelerating from October’s increase. Meanwhile, the broader CPI climbed to 2.6%, pointing to growing inflationary pressures within Japan’s economy.
As a result, market participants are now pricing in a 57% probability of a quarter-point rate hike by the BoJ on December 19, which has further contributed to the yen’s appreciation. The expectation of tighter monetary policy is seen as a response to persistent inflation, suggesting that the BoJ may shift its stance toward a more hawkish approach. This shift in market sentiment is providing momentum for the yen, contributing to its recent surge.
In addition to domestic inflationary pressures, several external factors are supporting the yen’s rally. A retreat of the US dollar is leaving room for the Japanese currency to climb. Moreover, heightened geopolitical tensions and concerns over economic disruptions from U.S. trade policies have intensified demand for haven assets, further benefiting the yen.
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