USD/JPY remains on the back foot below 156.00; BoJ-Fed policy divergence favors bears

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The USD/JPY pair struggles to capitalize on the previous day's move higher to levels beyond the 156.00 mark and edges lower during the Asian session on Wednesday. Spot prices currently trade around the 155.75 region, though the downtick lacks follow-through or a bearish conviction.

USD/JPY trades with a mild negative bias and is pressured by a combination of factors.
BoJ rate hike bets underpin the JPY and weigh amid dovish Fed-inspired USD weakness.
A positive risk tone caps gains for the safe-haven JPY and limits losses ahead of US data.

The Japanese Yen (JPY) continues with its relative outperformance on the back of rising bets for an interest rate hike by the Bank of Japan (BoJ). The expectations were lifted by BoJ Governor Kazuo Ueda's comments earlier this week, saying that the likelihood of the central bank's economic and price projections being met is rising. This was seen as the strongest signal that conditions for a rate hike were falling into place, which underpins the JPY and weighs on the USD/JPY pair.

The US Dollar (USD), on the other hand, struggles to attract any meaningful buyers and languishes near its lowest level since November 14, touched on Monday, amid the growing acceptance that the US Federal Reserve (Fed) will cut rates next week. This marks a significant divergence in comparison to the BoJ's hawkish outlook, which should continue to drive flows towards the lower-yielding JPY and suggests that the path of least resistance for the USD/JPY pair is to the downside.

That said, a generally positive risk tone is holding back traders from placing aggressive bullish bets around the safe-haven JPY. Investors also opt to wait for this week's important US macro releases before positioning for the next leg of a directional move. Wednesday's US economic docket features the release of the ADP report on private-sector employment and the ISM Services PMI. The focus, however, remains on the US Personal Consumption Expenditure (PCE) Price Index on Friday.

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 embarked in an ultra-loose monetary policy in 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. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.

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