- USD/JPY weakens near year-on-year low amid divergent Fed and BoJ monetary policy expectations.
- Bears may refrain from opening fresh positions ahead of key central bank event risks this week.
- The Fed will announce its decision on Wednesday, followed by the BoJ’s update on Friday.
The USD/JPY pair remains depressed around the mid-140.00 zone during the Asian session on Monday amid low trading volumes due to a holiday in Japan and looks vulnerable near the year-on-year low touched last week. However, bears might prefer to wait for risks from key central bank events this week 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. Meanwhile, diverging expectations for the Fed and BoJ monetary policy led to the recent unwinding of Japanese Yen (JPY) carry trades and continue to exert some downward pressure on the USD/JPY pair.
Markets began pricing in a 50 basis point (bp) rate cut by the US central bank as more likely after the US CPI and PPI report released last week signaled signs of easing inflationary pressures. In contrast, recent hawkish comments by BoJ officials reaffirmed market bets that the Japanese central bank will announce another interest rate hike before the end of the 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 seen 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 prevent bulls from opening fresh positions in the absence of relevant macroeconomic data.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets the country’s monetary policy. Its mandate is to issue banknotes and carry out monetary and foreign exchange control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has been pursuing ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflation environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing money to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further relaxed policy by first introducing negative interest rates and then directly controlling the yield on its 10-year government bonds.
The Bank of Japan’s massive stimulus 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 Bank of Japan and other major central banks, which have opted to sharply raise interest rates to combat decades-high inflation. The Bank of Japan’s policy of keeping rates low has led to a widening spread with other currencies, dragging down the value of the Yen.
The weak yen and the surge in global energy prices have caused Japanese inflation to rise, exceeding the Bank of Japan’s 2% target. However, the Bank of Japan judges that a sustainable and stable achievement of the 2% target is not yet in sight, so a sharp change in current monetary policy seems unlikely.
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.
