- USD/JPY weakens to near 146.05 in Thursday’s early Asian session, down 0.45% on the day.
- BoJ Summary of Opinions from the July meeting stated that some members suggested a neutral rate of at least 1%.
- Markets continue to price in a 50 bps Fed rate cut in September.
The USD/JPY pair hovers around 146.05 after retreating from a weekly high of 147.90 during the early Asian trading hours on Thursday. The downtick of the pair is backed broadly by the softer US Dollar (USD) and the safe-haven flows. Traders await the weekly US Initial Jobless Claims on Thursday for fresh impetus. This report could provide confirmation about the economic and employment market conditions in the United States.
The Bank of Japan's (BoJ) Summary of Opinions at the Monetary Policy Meeting on July 30 and 31, released on Thursday, showed that the Japanese central bank lays the groundwork for further policy normalization, although members did not specify the timing and pace. BoJ members suggested a neutral rate of at least 1% as a medium-term goal. The board members also noted that they expect a small hike to have no tightening effect.
On Wednesday, the BoJ Deputy Governor Uchida said, “I believe that the bank needs to maintain monetary easing with the current policy interest rate for the time being, with developments in financial and capital markets at home and abroad being extremely volatile.” Uchida suggested the BoJ would not hike if markets were unstable. The dovish comments from Japanese authorities are likely to undermine the JPY for the time being. The BoJ is now only expected to hike 15 basis points (bps) over the next 12 months, down from 50 bps expected right after its hawkish hike.
Meanwhile, rising geopolitical tensions in the Middle East could boost a safe-haven currency like the JPY. The news agency Al Arabiya reported that US officials are confident that Hezbollah’s and Iran’s response is imminent, and an initial assessment predicted an early week attack, but the most recent intelligence showed any response may be delayed until Thursday or Friday.
Mounting bets on US interest rate cuts in September might exert some selling pressure on the Greenback. According to the CME’s FedWatch Tool, rate markets have priced in a roughly 83% chance of a 50 basis points (bps) Fed rate cut in September, with a further two cuts expected through the rest of 2024.
Bank of Japan FAQs
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%.
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.
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.
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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