- USD/JPY continues to lose ground due to hawkish sentiment surrounding the BoJ’s policy stance.
- BoJ’s Nagakawa stated that the bank may adjust the degree of its monetary easing if the economy and inflation come as projected.
- CME FedWatch Tool suggests full pricing of at least a 25 basis point Fed rate cut in September.
USD/JPY loses ground for the second consecutive day, trading around 141.20 during the Asian hours on Wednesday. The Japanese Yen (JPY) remains solid following the remarks from Bank of Japan (BoJ) board member Junko Nagakawa.
BoJ board member Nagakawa stated that the central bank may adjust the extent of its monetary easing if the economy and prices align with its projections. Despite the rate hike in July, real interest rates remain deeply negative, and accommodative monetary conditions persist. Should long-term rates surge, the BoJ may reconsider its tapering plan during its policy meetings, as necessary.
The downside of the USD/JPY pair is also driven by the contrasting monetary policies of the Bank of Japan and the US Federal Reserve, which has been encouraging the unwinding of carry trades and boosting demand for the Japanese. BoJ Governor Kazuo Ueda reiterated the central bank's commitment to continue raising interest rates, provided the Japanese economy meets the bank’s forecasts through FY2025.
US Dollar (USD) remains subdued as the Treasury yields continue to decline ahead of the US Consumer Price Index (CPI) data scheduled to be released later in the North American hours. The upcoming inflation report may offer fresh cues regarding the potential magnitude of the Federal Reserve's (Fed) interest rate cut in September. Moreover, the recent US labor market report has cast doubt on the possibility of an aggressive Fed interest rate cut.
According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has slightly decreased to 31.0%, down from 38.0% a week ago.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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