- USD/JPY gains ground as chances of a smaller rate cut by the Fed in September increase.
- BoJ board member Naoki Tamura said there is no predetermined plan regarding the pace of future rate hikes.
- The CME FedWatch tool suggests the odds of a 50bp rate cut by the Fed have declined to 15.0%.
USD/JPY snaps its two-day losing streak, trading around 142.90 during European hours on Thursday. Japanese Yen (JPY) remains subdued following comments from Bank of Japan (BoJ) board member Naoki Tamura.
BoJ board member Tamura said there is “no predetermined idea about the pace of future rate hikes.” Unlike in the U.S. and Europe, rate hikes in Japan are expected to proceed more gradually. The exact moment when short-term rates in Japan might reach 1% will depend on economic and price conditions at the time.
The rise in the USD/JPY pair could be attributed to rising expectations of a smaller interest rate cut by the Fed in September. The US Consumer Price Index (CPI) data for August showed that headline inflation fell to a three-year low. This development has increased the likelihood of the Federal Reserve (Fed) starting its easing cycle with a 25 basis point interest rate cut in September.
The US Consumer Price Index declined to 2.5% year-on-year in August from the previous reading of 2.9%. The index missed the expected reading of 2.6%. Meanwhile, the headline CPI came in at 0.2% month-on-month. The core CPI excluding food and energy remained unchanged at 3.2% year-on-year. On a monthly basis, the core CPI rose to 0.3% from the previous reading of 0.2%.
According to the CME FedWatch tool, markets fully anticipate at least a 25 basis point (bp) rate cut by the Federal Reserve at its September meeting. The probability of a 50 bp rate cut has declined sharply to 15.0%, from 44.0% a week ago.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the most traded currencies in the world. Its value is determined broadly by the performance of the Japanese economy, but more specifically by the policy of the Bank of Japan, the spread between Japanese and US bond yields, and risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key to the Yen. The BoJ has intervened directly in currency markets on occasion, usually to lower the value of the Yen, although it often refrains from doing so due to political concerns of its major trading partners. The BoJ’s current ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its major currency peers. This process has been exacerbated more recently by a growing policy divergence between the BoJ and other major central banks, which have opted to sharply raise interest rates to combat decades-old levels of inflation.
The Bank of Japan’s stance of maintaining an ultra-loose monetary policy has led to an increase in policy divergence with other central banks, in particular with the US Federal Reserve. This favours the widening of the spread between US and Japanese 10-year bonds, which favours the Dollar against the Yen.
The Japanese Yen is often considered a safe haven investment. This means that in times of market stress, investors are more likely to put their money into the Japanese currency due to its perceived reliability and stability. In turbulent times, the Yen is likely to appreciate against other currencies that are considered riskier to invest in.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
