- USD/JPY stages a goodish recovery from over a one-month low touched on Friday.
- The JPY is undermined by a downward revision of Japan’s Q2 GDP growth figures.
- Reduced bets for a larger Fed rate cut boost the USD and lend additional support.
The USD/JPY pair attracts fresh buyers at the start of a new week and reverses a major part of Friday's losses to the 141.75 area or over a one-month low. Spot prices maintain the bid tone through the early European session and currently trade around the 143.20 mark and draw support from a combination of factors.
The Japanese Yen (JPY) is pressured by a downward revision of the second quarter Gross Domestic Product (GDP) print, which, in turn, is seen as a key factor acting as a tailwind for the USD/JPY pair. Official data published earlier today showed that Japan's economy grew at a slightly slower pace, by an annualized 2.9% in the April-June quarter as compared to a 3.1% rise in the preliminary estimate. This, along with a sluggish consumer spending growth in July, might complicate the Bank of Japan's (BoJ) plans to hike interest rates in the coming months.
Apart from this, a generally positive tone around the European equity markets is seen undermining demand for the safe-haven JPY. The US Dollar (USD), on the other hand, builds on Friday's recovery from over a one-week low amid an uptick in the US Treasury bond yields, bolstered by reduced bets for a 50 basis points (bps) interest rate cut by the Federal Reserve (Fed) later this month. This further contributes to the USD/JPY pair's intraday positive move, though the divergent BoJ-Fed policy expectations warrant some caution before positioning for further gains.
The BoJ Governor Kazuo Ueda said last week that the central bank will continue to raise interest rates if the economy and prices perform as expected. Adding to this, an unexpected rise in Japan's real wages for the second straight month in July keeps hopes alive for another BoJ rate hike by the end of 2024. Hence, it will be prudent to wait for strong follow-through buying beyond the 143.75-143.80 horizontal support breakpoint before confirming that the USD/JPY pair's recent downfall has run its course and positioning for any further appreciating move.
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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