USD/JPY flat lines near 147.50 as Fed rate cut bets grow

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The USD/JPY pair holds steady near 147.60 during the early Asian session on Monday. The expectations that the US Federal Reserve (Fed) will deliver its first rate cut of the year this week could weigh on the US Dollar (USD) against the Japanese Yen (JPY).

USD/JPY trades flat around 147.60 in Monday’s early Asian session.
The Fed is expected to cut its Federal Funds Rate for the first time since December.
Political uncertainty in Japan could undermine the Japanese Yen.

A rise in the US Initial Jobless Claims and a modest increase in inflation kept investors focused on likely Fed interest rate cuts at its September meeting on Wednesday and beyond. Markets have fully priced in a September reduction and now expect three Fed rate cuts this year, compared to two just weeks ago. Fed Chair Jerome Powell and other policymakers signaled an easing of monetary policy despite inflation risks related to tariffs. A dovish tone from the Fed officials could undermine the Greenback in the near term.

"The broader picture is still quite negative for the dollar on a variety of measures," said John Velis, Americas macro strategist at BNY in New York. "One, of course, is the Fed now beginning to cut rates. The other is, we still see hedging behavior taking place, so foreign investors buying U.S. assets and selling the dollar to hedge it, which is going to keep pressure on the dollar,” added Velis.

On the other hand, Japan’s Prime Minister Shigeru Ishiba announced his resignation, facing growing pressure after last year’s election defeat and widening divisions within the ruling party. Political uncertainty in Japan following Ishiba's resignation could offer the Bank of Japan (BoJ) extra room to delay its next interest rate hike, especially if the next leader is concerned about borrowing prices rising too rapidly. This, in turn, could drag the JPY lower and create a tailwind for the pair.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese 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.

How does broader risk sentiment impact the Japanese Yen?

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.

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