USD/JPY gathers strengthen to near 156.00 as Japan earthquake weighs on Japanese Yen

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USD/JPY drifts higher to around 155.95 in Tuesday’s early Asian session.
News of the earthquake in Japan exerts some selling pressure on the Japanese Yen.
The US Fed is widely expected to cut its policy rate by 25 bps, according to the CME FedWatch Tool.

The USD/JPY pair attracts some buyers to near 155.95 during the early Asian session on Tuesday. The Japanese Yen (JPY) weakens against the US Dollar (USD) as traders assess the potential impact of a strong earthquake in Japan. The Bank of Japan Governor Kazuo Ueda's speech will be in the spotlight later on Tuesday ahead of the Federal Reserve (Fed) interest rate decision.

CNBC reported that a massive 7.6-magnitude earthquake shook northeastern Japan late on Monday, triggering tsunami warnings and orders for about 90,000 residents to evacuate. Following the tremor, the JMA issued an advisory for a wide region from the northernmost island of Hokkaido down to Chiba prefecture, east of Tokyo, warning inhabitants to be prepared for the likelihood of another major earthquake within a week. The JPY edges lower against major currencies after reports of the tremor.

The downside for the JPY might be limited amid hawkish Bank of Japan (BoJ) expectations. Japan's wage growth data reaffirmed market bets for an imminent rate hike by the Japanese central bank in December. Markets are currently pricing in a rate hike, with overnight index swaps (OIS) indicating nearly a 90% chance of a 25 basis points (bps) increase to 0.75%.

On the USD’s front, markets expect a rate cut from the US Fed on Wednesday due to recent softer US economic data and moderating inflation reports. Fed funds futures traders are now pricing in nearly a 90% chance of a rate reduction in the December meeting, up from 71% probability a week ago, according to the CME FedWatch Tool.

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.