USD/JPY strengthens to near 148.00 ahead of BoJ rate decision
- USD/JPY edges higher to around 147.95 in Friday’s early Asian session.
- Fed lowered its benchmark rate by 25 basis points, bringing overnight funds rate in a range between 4.00%-4.25%.
- The BoJ is expected to keep its interest rate steady at 0.50% later on Friday.
The USD/JPY pair gains traction near 147.95 during the early Asian session on Friday. The US Dollar (USD) strengthens against the Japanese Yen (JPY) after the Federal Reserve (Fed) delivered an expected rate cut but signaled no rush to lower borrowing costs quickly in the coming months. The Bank of Japan (BoJ) interest rate decision will take center stage later on Friday.
The US central bank on Wednesday decided to cut the interest rate by a quarter-point and signaled that two more reductions are on the way before the end of the year as worries intensified over the US labor market, even as inflation is still in the air. The decision puts the overnight funds rate in a range between 4.00%-4.25%.
“A majority of the FOMC is now targeting two further cuts this year, indicating that the doves on the committee are now in the driver’s seat,” said Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management.
The BoJ is broadly anticipated to leave its benchmark interest rate unchanged at around 0.50% at a two-day meeting ending on Friday. The Japanese central bank has kept rates on hold for the fourth consecutive meeting, citing uncertainty about how US import tariffs will affect Japan's economy.
Traders will take more cues from the speech from the BoJ Governor Ueda Kazuo after the policy meeting, which might offer some hints about the economic outlook for Japan. Any hawkish remarks from the BoJ policymakers could lift the JPY and create a headwind for the pair. According to a Reuters poll, a majority of economists expect another 25 basis points (bps) hike by year-end. But those surveyed were split on the timing, with bets centring on October and January.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
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