In the early hours of the Asian trading session on Monday, the USD/JPY currency pair settled flat around the 148.00 mark. This stability comes on the heels of the U.S. Federal Reserve’s recent decision to cut interest rates, a move that was anticipated by market participants but accompanied by indications of a measured approach to future monetary easing.
Last week, the Federal Reserve officially lowered interest rates, yet conveyed little urgency in implementing further cuts in the near term. The central bank’s “dot plot” projection revealed expectations for two additional rate reductions before the year concludes. Analysts noted that this less dovish outlook than many had anticipated could bolster the U.S. dollar in the short run. Marc Chandler, chief market strategist at Bannockburn Forex, remarked, “It’s really a week of two halves,” emphasizing the discrepancy between the Fed’s less dovish projections and the statement released post-meeting, which raised concerns about the labor market.
In Japan, the Bank of Japan (BoJ) maintained its short-term interest rate at 0.5% for the fifth consecutive meeting. However, the decision was not unanimous, as only seven of the nine board members supported the stance, with two dissenting in favor of a rate increase. This unexpected divergence created uncertainty among investors, heightening attention toward the potential timing of the BoJ’s next rate hike, which could potentially strengthen the Japanese yen. Following this meeting, traders have adjusted their expectations to factor in a more than 75% likelihood that the BoJ will raise rates by 25 basis points in October.
The Japanese yen is internationally recognized as one of the most actively traded currencies. Its value is primarily influenced by the performance of the Japanese economy, the policy direction of the Bank of Japan, the yield differential between Japanese and U.S. bonds, as well as overall market risk sentiment.
The BoJ’s mandate includes maintaining currency control, making its policy decisions crucial to the contours of the yen’s value. While the central bank has occasionally intervened in foreign exchange markets to lower the yen’s value, such actions are rare due to the political ramifications with key trading partners. Historically, the BoJ’s ultra-loose monetary policy from 2013 through 2024 led to a depreciation of the yen against other major currencies. However, recent moves to gradually unwind this policy have provided a measure of support for the yen.
Over the past decade, the BoJ’s commitment to ultra-loose monetary policy fostered a widening divergence between its stance and those of other central banks, especially the U.S. Federal Reserve. This divergence has further enhanced the appeal of the U.S. dollar against the yen. A set of shifts anticipated in 2024, with the BoJ moving away from such a policy and other major banks making rate cuts, may narrow this yield differential.
The yen is also perceived as a safe-haven currency, gaining traction during times of market volatility as investors seek stability. As tensions mount in global markets, the yen has consistently been viewed as a reliable investment, contrasting with other currencies deemed riskier.
