USD/JPY weakens below 156.00 amid Fed rate cut outlook, BoJ rate hike anticipation
- USD/JPY softens to around 155.75 in Monday’s early Asian session.
- Trump said Kevin Warsh is at the top of the Fed chair candidate list.
- The Bank of Japan interest rate decision will take center stage on Friday.
The USD/JPY pair trades on a negative note near 155.75 during the early Asian session on Monday. The US Dollar (USD) softens against the Japanese Yen (JPY) amid the prospect of interest rate cuts by the US Federal Reserve (Fed) next year. Fed Governor Stephen Miran and New York Fed President John Williams are set to speak later in the day.
The Fed decided to cut the interest rates as expected at its December meeting, as expected last week, but remarks from Chair Jerome Powell were viewed by traders as less hawkish than expected and exerted some selling pressure on the Greenback against the JPY. The Fed's updated economic projections, so-called the "dot plot," indicated a median forecast for only one additional rate reduction in 2026.
US President Donald Trump said on Friday that Fed Governor Kevin Warsh has moved to the top of his list as the next Fed Chair, though others remain in contention, per the Wall Street Journal. When asked about National Economic Council Director Kevin Hassett, whom prediction markets had earlier predicted as the frontrunner, Trump said, “I think you have Kevin and Kevin. They’re both — I think the two Kevins are great.”
Traders have been pricing in the chance that the Bank of Japan (BoJ) will hike interest rates on Friday. Reuters reported that the Japanese central bank would likely maintain a pledge at the December policy meeting to keep raising interest rates but noted that the pace of further hikes would depend on how the economy reacts to each increase. This, in turn, could underpin the Japanese Yen and create a headwind for the pair.
On the other hand, the downside for the pair might be limited due to concerns about Japan’s deteriorating fiscal condition. Prime Minister Sanae Takaichi's massive spending plan has raised fears for Japan's public finances amid sluggish economic growth.
Japanese Yen FAQs
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.
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.
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.
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.
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