USD/JPY holds below 145.00 after BoJ Minutes

USD/JPY loses traction around 144.60 in Thursday’s early Asian session, down 0.10% on the day.
Dovish Fed and rising bets on jumbo rate reduction weigh on the USD.
Board members call for a gradual and timely rate increase, noted BoJ Minutes.

The USD/JPY pair edges lower to near 144.60 during the early Asian session on Thursday. The weakening of the US Dollar (USD) amid rising bets on a jumbo interest rate reduction from the US Federal Reserve (Fed) in November continues to weigh on the pair. Investors await economic data and signals on upcoming interest rate cuts from Fed officials.

Data released by the Commerce Department showed on Wednesday that US New Home Sales fell 4.7% MoM to 716,000 in August from a revised 751,000 in July, above the market consensus. Earlier this week, a weaker-than-expected US consumer sentiment report raised concerns about the health of the labor market, prompting the expectation of further deeper rate cuts by the Fed.

Traders have priced in nearly 57.4% odds of a 50 basis points (bps) cut by the Fed in the November meeting, while the chance of a 25 bps reduction stands at 42.6%, according to the CME FedWatch Tool. The Fed Chair Jerome Powell's speech will be in the spotlight on Thursday. Also, the final US Gross Domestic Product (GDP) Annualized for the second quarter (Q2) is due later in the day, and the figure is estimated to grow by 3.0%. Any indication of additional jumbo rate reduction by the Fed or signs of weakness in the US economy might drag the Greenback lower in the near term.

On the other hand, the Bank of Japan (BoJ) releases minutes of its July policy meeting on Thursday. The BoJ members called for a gradual and timely rate increase. Many members said it was appropriate to raise the interest rates to 0.25%, adjusting the degree of monetary support and few members said it was appropriate to adjust the degree of monetary support moderately.

Finance Minister Shunichi Suzuki said on Tuesday that the central bank will take appropriate monetary policy actions while continuing to coordinate closely with the government. The potential for the BoJ to delay raising interest rates further might undermine the JPY and cap the downside for USD/JPY.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus 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 policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

Is the Bank of Japan’s ultra-loose policy likely to change soon?

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.

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