USD/JPY softens to near 147.00 as Fed rate cut bets stay firm
- USD/JPY weakens to around 147.15 in Friday’s early Asian session.
- US CPI inflation rises to 2.9% YoY in August as expected.
- Uncertainty surrounding who will become the next Prime Minister could undermine the Japanese Yen and help limit the pair’s losses.
The USD/JPY pair attracts some sellers near 147.15 during the early Asian session on Friday. The US Dollar (USD) remains weak against the Japanese Yen (JPY) as US inflation reports support the case for the first interest rate cut by the Federal Reserve (Fed) since December 2024. The release of the University of Michigan Consumer Sentiment Index will be the highlight later on Friday.
Data released by the US Bureau of Labor Statistics (BLS) on Thursday showed that the US Consumer Price Index (CPI) rose 2.9% YoY in August, compared to 2.7% in July. This figure came in line with the market expectation. On a monthly basis, the CPI inflation climbed to 0.4% in August from a 0.2% increase seen in July. The core CPI, which excludes volatile food and energy prices, increased 3.1% on a yearly basis in August, matching the estimate.
Markets are currently pricing in a 25 basis points (bps) rate cut at the conclusion of the Fed’s September 17 meeting with near certainty, according to the CME FedWatch tool. The chance that the US central bank will cut by a half percentage point also edges higher. This, in turn, could exert some selling pressure on the Greenback in the near term.
On the other hand, political uncertainty in Japan following Prime Minister Shigeru Ishiba's resignation could offer the Bank of Japan (BoJ) extra room to delay its next interest rate hike, especially if the next leader is concerned about borrowing prices rising too rapidly.
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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