Japanese Yen underperforms despite signals of further BoJ tightening

• USD/JPY holds firm as Japanese Yen weakness offsets a pullback in the US Dollar.
• Softer US Treasury yields and intervention concerns around the 160 level limit the pair’s upside.
• Markets await the FOMC minutes for fresh clues on the Fed’s interest rate path.

USD/JPY holds firm on Tuesday as the Japanese Yen (JPY) trades on the defensive across the board. However, a softer US Dollar (USD), weighed down by a pullback in US Treasury yields, and intervention concerns around the 160 level limit the upside, keeping the pair range-bound. At the time of writing, USD/JPY trades around 158, up 0.10% on the day.

The Japanese Yen struggles to gain traction as Bank of Japan (BoJ) Governor Kazuo Ueda reiterates the case for further tightening while leaving the timing and pace of future rate hikes dependent on economic developments.

Speaking on Tuesday, Ueda said, “We're to keep raising rates in response to the economy and inflation.” However, he added that the “pace and timing of future policy adjustment will be decided based on the likelihood of our baseline projections materialising, as well as risks.”

Ueda also flagged the possibility of underlying inflation exceeding the BoJ’s 2% target, citing pressures associated with the Middle East conflict, AI-related demand and persistent Yen weakness. His remarks keep further rate increases on the table but offer limited guidance on whether the central bank will act at its October 29-30 meeting.

Analysts also link the Yen’s softer tone to a Bloomberg report published on Monday that Japan’s Government Pension Investment Fund (GPIF) did not discuss portfolio allocation at its September meeting. The report dampened hopes that the fund would bring money back to Japan to invest in domestic assets.

On the US side, Treasury yields retreat as the recent bond selloff pauses. The benchmark 10-year yield falls to around 5.27% after reaching 5.349% on Monday, its highest level since 2002. The decline takes some support away from the Greenback. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, retreats toward 101.80 after reaching a fresh year-to-date high of 102.53 the previous day.

Even so, inflation and fiscal concerns keep US yields elevated, preserving a wide gap with Japanese yields and maintaining the appeal of US Dollar-denominated assets.

On the monetary policy front, the Federal Reserve’s (Fed) broader outlook remains hawkish as policymakers work to bring inflation back toward the 2% target. However, softer-than-expected Nonfarm Payrolls (NFP) and Personal Consumption Expenditures (PCE) inflation data released last week have reduced pressure on the Fed to raise rates at its October 27-28 meeting. Traders now await the Federal Open Market Committee (FOMC) meeting minutes, due on Wednesday, for clues on the Fed’s next move.