• USD/JPY rises sharply as the US Dollar rebounds after signals perceived as more restrictive on monetary policy.
• Kevin Warsh’s nomination reassures markets about the Federal Reserve’s policy direction and independence.
• Stronger-than-expected US producer inflation supports the Greenback, while Japanese data argue for patience from the BoJ.

USD/JPY rebounds around 154.50 on Friday at the time of writing, up 0.90% on the day, supported by a renewed recovery in the US Dollar (USD) after several weeks of weakness. The move comes as markets reassess the monetary policy outlook in the United States (US) and Japan.

The US Dollar strengthened after US President Donald Trump expressed his support for Kevin Warsh to lead the Federal Reserve (Fed). If confirmed by the Senate, Kevin Warsh would succeed Jerome Powell, whose term is set to expire in May. Investors, who initially feared a highly dovish nomination given the president’s repeated calls for lower interest rates, are instead viewing Warsh as a relatively hawkish choice. A former Fed Governor, he is seen as an institutional figure, which has helped ease recent concerns about the central bank’s independence.

The US Dollar also draws support from firmer-than-expected inflation data. The US Producer Price Index (PPI) rose by 0.5% MoM in December, following a 0.2% increase in November, while the annual rate stands at 3.0%, above expectations. The core measure surprised even more, with a 0.7% monthly increase and a 3.3% annual rate, signaling that upstream inflationary pressures remain strong.

Comments from Federal Reserve officials remain mixed, however. Governor Christopher Waller said he favored a 25-basis-point rate cut at the last meeting, arguing that monetary policy remains too restrictive relative to a neutral level near 3%. By contrast, Atlanta Fed President Raphael Bostic called for patience, stressing the need to see clear progress toward the 2% inflation target.

In Japan, recent data reinforce the contrast with US dynamics. Tokyo CPI figures showed inflation cooling in January. Headline inflation rose 1.5% YoY after 2% in December, while underlying measures eased to 2%, below forecasts. This moderation in price pressures reduces the urgency for the Bank of Japan (BoJ) to raise interest rates.

According to a note from BBH, the Bank of Japan can afford to remain patient before resuming its tightening cycle. Rate markets have trimmed the probability of a March hike, now favoring a rate increase in April. Weaker activity indicators, including a MoM decline in Retail Sales, support this cautious stance.