Japanese Yen weakens vs. USD as fiscal woes offset BoJ rate hike bets ahead of FOMC Minutes

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The USD/JPY pair attracts fresh buyers following the previous day's volatile price swings and climbs above mid-153.00s during the Asian session on Wednesday.

USD/JPY regains positive traction as expectations for more stimulus from Japan revive fiscal concerns.
Bets that the BoJ will stick to its policy tightening path could limit the JPY losses and cap spot prices.
Dovish Fed expectations might hold back the USD bulls from placing fresh bets ahead of FOMC Minutes.

The USD/JPY pair attracts fresh buyers following the previous day's volatile price swings and climbs above mid-153.00s during the Asian session on Wednesday. However, a combination of factors keeps spot prices below the weekly high set on Tuesday as traders now look forward to the FOMC Minutes for some meaningful impetus.

Japan's softer Q4 GDP report released earlier this week puts more pressure on Japan's Prime Minister Takaichi to announce more stimulus after her landslide victory. Meanwhile, the International Monetary Fund (IMF) warned against cutting the consumption tax, saying that it would erode Japan's fiscal space and raise debt risks. Apart from this, expectations that Takaichi will push back against further interest rate hikes by the Bank of Japan (BoJ) undermine the safe-haven Japanese Yen (JPY).

Furthermore, a generally positive risk tone, bolstered by easing geopolitical tensions amid signs of progress in US-Iran nuclear talks, dents the JPY's safe-haven status. This, along with a modest US Dollar (USD) uptick, assists the USD/JPY pair in regaining some positive traction. Meanwhile, investors remain hopeful that Takaichi could be fiscally responsible and that her policies will boost the economy. This might prompt the BoJ to stick to its policy normalization path and limit JPY losses.

Moreover, the IMF urged Japan to keep raising interest rates to keep inflation expectations well anchored. Adding to this, the Reuters Tankan poll showed Japanese manufacturers' confidence rose for the first time in three months in February. Moreover, government data revealed that Japan's exports rose 16.8% YoY in January, marking the fastest rate since November 2022. This might hold back the JPY bears from placing aggressive bets and cap any further gains for the USD/JPY pair.

The USD, on the other hand, might struggle to attract meaningful buyers amid the growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs several times this year. Traders might also opt to wait for the FOMC Minutes, which, along with the release of the US Personal Consumption Expenditure (PCE) Price Index on Friday, would provide more cues about the Fed's rate-cut path. This, in turn, will drive the USD and provide a fresh impetus to the USD/JPY pair.

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.