- Despite the US dollar trending steadily, USD/JPY has fallen to around 154.00.
- Donald Trump's policies are expected to boost US inflation and economic growth.
- The Bank of Japan did not commit to raising interest rates in December.
The USD/JPY pair fell to near 154.00 in Thursday's European session. Assets weakened despite modest gains in the US dollar (USD), with the US dollar index (DXY) rising to near 106.70. The USD index is heading back to its year-to-date high of 107.00 as investors expect fewer rate cuts from the Federal Reserve in the current policy easing cycle.
The Fed is expected to take a data-driven approach and refrain from cutting rates aggressively, with market experts predicting U.S. inflation will rebound and economic growth will pick up. Victories in both houses of Congress would allow him to lower interest rates. smoothly implement his economic policies;
President Trump has vowed to raise import tariffs by 10% across the board and cut taxes, but these measures do not allow the Fed to cut interest rates further. According to the CME FedWatch tool, there is a 56% chance that the Fed will cut rates by 25 basis points (bp) to 4.25% to 4.50% at its December meeting, down from 72% a week ago.
Global brokerage firm Nomura expects the Fed to pause its policy easing cycle in December. “We currently expect tariffs to increase realized inflation by the summer, with risks skewing toward an earlier and longer-term halt,” Nomura analysts said.
Meanwhile, although Bank of Japan Governor Kazuo Ueda did not explicitly announce an interest rate hike at the December meeting, he did leave the possibility of an interest rate hike on the table in comments at the Europlace Financial Forum held in Tokyo. Despite this, the Japanese yen (JPY) has remained strong. At the beginning of Thursday.
Kazuo Ueda said, “Decisions will be made at the Monetary Policy Meeting based on information obtained by the time of the meeting,'' adding, “There is still one month until the next monetary policy meeting. More information will likely be obtained by then.'' ” he added.
Frequently asked questions about the Japanese Yen
The Japanese Yen (JPY) is one of the most traded currencies in the world. Its value is determined broadly by trends in Japan's economy, but more specifically by factors such as the Bank of Japan's policies, the difference in Japanese and U.S. bond yields, and traders' risk sentiment.
One of the Bank of Japan's missions is exchange control, so its trends are key to the yen. The Bank of Japan occasionally intervenes directly in currency markets, generally to devalue the yen, but does not do so frequently due to political concerns in major trading partners. The Bank of Japan's ultra-easy policy from 2013 to 2024 widened the policy divergence between the Bank of Japan and other major central banks, causing the yen to weaken against major currencies. Recently, the gradual easing of this ultra-easy policy has provided some support to the yen.
Over the past decade, the Bank of Japan's commitment to ultra-easy monetary policy has widened its policy divergence from that of other central banks, particularly the US Federal Reserve. This confirmed the widening gap between US 10-year bonds and Japan's 10-year bonds, which favored the US dollar against the Japanese yen. The gap is narrowing with the Bank of Japan's decision to gradually abandon its ultra-easy policy in 2024, coupled with interest rate cuts by other major central banks.
The Japanese yen is often seen as a safe investment. This means that when markets are under stress, investors are more likely to put money into the Japanese currency, which is expected to be reliable and stable. Times of turmoil are likely to increase the value of the yen against other currencies that are considered riskier investments.
