USD/JPY loses momentum below 155.50 as Fed rate cut looms, Japan-China military tensions flare

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USD/JPY softens to around 155.25 in Monday’s early Asian session.
The Fed is anticipated to cut its interest rate by 25 bps on Wednesday.
Japan said Chinese fighter jets targeted its aircraft near Okinawa.

The USD/JPY pair loses ground to near 155.25 during the early Asian session on Monday. The US Dollar (USD) weakens against the Japanese Yen (JPY) as traders brace for the Federal Reserve (Fed) meeting this week, where policymakers are widely expected to cut interest rates. The final reading of Japan’s Gross Domestic Product (GDP) report for the third quarter will be released later on Monday.

Traders increased their expectation that the US central bank will deliver a 25 basis points (bps) rate reduction at its December meeting. According to the CME FedWatch tool, financial markets are currently pricing in nearly a 90% chance of a quarter-point rate cut next week.

Additionally, the prospect of White House economic adviser Kevin Hassett taking over as Fed Chair could weigh on the Greenback, as he is expected to push for more rate cuts. US President Donald Trump said on Tuesday he plans to announce his choice to succeed Jerome Powell as head of the Fed early next year.

Elsewhere, Japan said that Chinese fighter jets twice directed fire-control radar at its F-15 aircraft over international waters near Okinawa, calling the incidents highly unsafe. Defence Minister Shinjiro Koizumi said that the radar “illumination” recorded on Saturday exceeded anything required for routine aviation safety. Koizumi stated that Japan would respond “firmly yet without provocation” to safeguard regional stability.

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.