Japanese Yen softens to near 155.00 on hawkish Fed Minutes

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USD/JPY drifts higher to near 155.00 in Thursday’s early Asian session.
Hawkish signals from the Fed support the US Dollar.
Further rate hikes by the BoJ by April or July are expected to lift the Japanese Yen and create a headwind for the pair.

The USD/JPY pair gains traction to around 155.00 during the Asian trading hours on Thursday. The US Dollar (USD) strengthens against the Japanese Yen (JPY) following hawkish Federal Reserve (Fed) meeting minutes. Traders brace for Japan’s National Consumer Price Index (CPI) data on Friday for fresh impetus.

The US central bank decided to cut its benchmark rate by three-quarters of a percentage point in consecutive reductions in September, October and December. Those moves bring the key rate in a range between 3.5%-3.75%.

According to minutes released on Wednesday from the January Fed meeting, officials split on where the interest rates should go. Several policymakers stated that rate hikes could be on the table and wanted the post-meeting statement to more closely reflect “a two-sided description of the Committee’s future interest rate decisions.”

Japanese Prime Minister Sanae Takaichi’s landslide election victory earlier this month has led to expectations of expansionary fiscal policy, including a potential two-year suspension of food sales tax. The IMF has warned Japan to avoid these tax cuts to maintain fiscal stability.

Analysts anticipate the next rate hike is most likely to occur in April. Some market experts indicate a move as early as March is possible if economic data, particularly wage negotiations and inflation trends, remain strong.

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.