USD/JPY seems vulnerable near YTD low, around mid-140.00s ahead of Fed/BoJ meetings this week

USD/JPY languishes near the YTD low amid the divergent Fed-BoJ policy expectations.
Bears might refrain from placing fresh bets ahead of this week’s central bank event risks.
The Fed will announce its decision on Wednesday, followed by the BoJ update on Friday.

The USD/JPY pair remains depressed around mid-140.00s during the Asian session on Monday, amid thin trading volumes on the back of a holiday in Japan, and seems vulnerable near the year-to-date (YTD) low touched last week. Bearish traders, however, might prefer to wait for this week's key central bank event risks before positioning for any further depreciating move.

The Federal Reserve (Fed) is scheduled to announce its decision at the end of a two-day meeting on Wednesday, which will be followed by the Bank of Japan (BoJ) policy update on Friday. In the meantime, the divergent Fed-BoJ policy expectations led to the recent unwinding of the Japanese Yen (JPY) carry trades and continue to exert some downward pressure on the USD/JPY pair.

The markets started pricing in a greater chance of an oversized, 50 basis points (bps) rate cut by the US central bank after the US CPI and PPI report released last week pointed to signs of easing inflationary pressures. In contrast, the recent hawkish remarks by BoJ officials reaffirmed market bets that the Japanese central bank will announce another interest rate hike by the end of this year.

This, in turn, suggests that the path of least resistance for the USD/JPY pair remains to the downside and supports prospects for an extension of a well-established downtrend witnessed over the past two months or so. That said, a generally positive risk tone could cap any meaningful gains for the safe-haven JPY and hold back bulls from placing fresh bets in the absence of any relevant macro data.

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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