USD/JPY weakens to near 147.50 after Fed’s Powell speech
- USD/JPY softens around 147.60 in Wednesday’s early Asian session.
- Fed’s Powell said slowing labor market prompted rate cut.
- Domestic political uncertainty could undermine the Japanese Yen and help limit the pair’s losses.
The USD/JPY pair declines to near 147.60 during the early Asian session on Wednesday. The US Dollar (USD) remains weak against the Japanese Yen (JPY) as traders continue to assess different comments from Fed officials, while key gauges of US business activity disappointed investors somewhat. Later on Wednesday, the US August New Home Sales data will be released.
Fed Chair Jerome Powell said on Tuesday that weakness in the labor market is outweighing concerns about stubborn inflation, leading to a decision he backed to cut the key interest rate at its September meeting last week. However, Powell further stated that he is comfortable with the current policy path, though he indicated the possibility of further cuts should the FOMC see the need to be more accommodative.
Money markets are currently pricing in nearly a 90% possibility of a Fed rate cut in October, down slightly from 92% a day earlier, according to the CME FedWatch tool.
On the other hand, political uncertainty in Japan following Japan’s Prime Minister Shigeru Ishiba's resignation could weigh on the JPY and create a tailwind for the pair. A Liberal Democratic Party (LDP) leadership election will take place on 4 October, and the outcome could affect the likely timing of the next rate hike by the Bank of Japan (BoJ) if a candidate with dovish views is selected.
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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