Japanese Yen recovery halts below 163.30 US Dollar with Fed’s decision on tap
- USD/JPY retreats from 40-year highs of 163.99 but remains above previous highs at 163.60.
- Investors are biding their time ahead of the Fed's monetary policy decision.
- Fed tightening bets and high oil prices are offsetting the BoJ's hawkish stance.
The Japanese Yen (JPY) has trimmed some losses against the US Dollar (USD) on Wednesday, but USD/JPY dips have been capped above previous highs, in the 163.30 area so far. The Yen remains close to the 40-year high of 163.99 reached earlier this month, with investors awaiting the US Federal Reserve’s (Fed) monetary policy decision due later in the day.
The Fed is likely to leave its monetary policy unchanged. Futures markets, however, show a 35% chance of a rate hike, as measured by the CME Group’s FedWatch Tool, which poses an uncommon degree of uncertainty hours ahead of the decision. A surprise rate hike will likely send the US Dollar rallying, but a pause with some signals of monetary tightening in the coming months might also provide support for the USD.
US economy has been showing signs of resilience to Iran’s war, and inflation remains well above target while recent hostilities in the Gulf have triggered an uptick in Oil prices. Fed Chairman Kevin Warsh is not a big supporter of forward guidance, but policymakers' concerns about inflation are likely to be seen as a hawkish sign and likely to provide some support to the USD.
Yen focus stays on Fed and energy as BoJ seen on hold
Analysts at ING expect the Bank of Japan to leave policy unchanged on 31 July, and add that while some in the market see scope for “a faster tightening cycle and an October hike,” ING argues that “we doubt any modest hawkish shift will materially boost the yen or alter the USD/JPY outlook.”
Instead, ING stresses that “energy prices and the Fed reaction function look to be the bigger driver of USD/JPY over the coming months, rather than a potentially more hawkish BoJ. The experts expect Wednesday’s FOMC meeting to “have a big say here" and that "barring a surprisingly dovish Fed meeting, or a sudden drop in Brent back to $70/bl, we expect to stay bid near 163/164 into the BoJ meeting.”
ING also flags “an outside risk of USD/JPY making a run at 165 if Governor Ueda is insufficiently hawkish in his press conference.” They observe that the risk of FX intervention remains, although theu recall that "the BoJ spent $70bn in late April/early May and has remaining FX reserves of $1.09 trillion,” and that, “without doubt, Japanese authorities would prefer to sell USD/JPY into a falling market for greater effectiveness, but likely would be called into action should the 165 area be challenged.”
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
