USD/JPY softens to near 157.50 amid Fed rate cut expectations
- USD/JPY edges lower to around 157.50 in Monday’s early Asian session.
- Potential Fed rate cuts in 2026 amid softer inflation and a cooling US jobs market weigh on the US Dollar.
- The BoJ has adopted a restrictive monetary policy stance by raising interest rates to their highest level in three decades.
The USD/JPY pair loses ground to near 157.50 during the early Asian session on Monday. The prospect of further US Federal Reserve (Fed) interest rate cuts in 2026 weighs on the US Dollar (USD) against the Japanese Yen. Financial markets are likely to trade in a subdued mood as investors position themselves ahead of the long holiday period. The US Chicago Fed National Activity Index report for September is due later on Monday.
The recent soft US inflation and cool jobs reports have fueled market expectations for at least two 25-basis-point rate cuts from the US central bank next year. This contrasts with a generally more hawkish pivot from the Bank of Japan (BoJ) and exerts some selling pressure on the Greenback in the near term.
Financial markets are pricing in only a 21.0% probability the Fed will reduce interest rates at its next meeting in January, after it cut them by a quarter-point at each of its last three meetings, according to the CME FedWatch tool.
Nonetheless, hawkish comments from the Fed officials might help limit the USD’s losses. Cleveland Fed President Beth Hammack said on Sunday that she saw no need to change US interest rates for months ahead after the Fed reduced borrowing costs at its last three meetings.
The BoJ board members decided to raise the short-term interest rate by 25 bps to 0.75%, the highest in 30 years, following the conclusion of its two-day policy meeting on Friday. BoJ Governor Kazuo Ueda said during the press conference that Japan's economy is recovering moderately, albeit with some weakness. Ueda further stated that the central bank will closely monitor the impact of the latest rate change, and the pace of monetary adjustment will depend on the economic, price, and financial outlook.
Despite this hawkish pivot, the Japanese central bank has refrained from providing explicit forward guidance regarding the timing of future movements. The uncertainty surrounding the future BoJ interest rate path could undermine the JPY and create a tailwind for the pair.
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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