Japanese Yen firms as US Dollar retreats on Fed criticism, trade risks
- The Japanese Yen rises against the US Dollar as the Greenback weakens amid renewed trade tensions and political pressure on the Federal Reserve.
- Japan’s ruling coalition loses its majority in the upper house, fueling political uncertainty and raising concerns over the direction of future fiscal and economic policy.
- Treasury Secretary Bessent calls for a full review of the Fed, fueling concerns about central bank independence.
The Japanese Yen (JPY) pushes higher against the US Dollar (USD) on Monday as the Greenback softens amid falling US Treasury yields and cautious market sentiment. While the Yen is getting a lift after Sunday’s upper house election, political uncertainty in Japan following the ruling coalition’s loss of majority could limit further gains.
Investors are increasingly concerned that the fragmented political landscape may complicate the government’s ability to implement economic reforms or coordinate effectively with the Bank of Japan (BoJ). This could slow down key fiscal decisions or delay any adjustments to the BoJ’s policy stance, keeping traders on edge despite the Yen’s initial bounce.
The USD/JPY is edging lower, hovering around 147.30 during American trading hours. Meanwhile, the US Dollar Index (DXY) is trading under pressure against its major peers, with the index slipping below the 98.00 mark, down nearly 0.75% on the day amid rising political noise in Washington.
Speaking on CNBC Monday, Treasury Secretary Scott Bessent took direct aim at the Federal Reserve, saying it's time to “examine the entire institution and whether they’ve been successful.” His comments added to growing market anxiety about political pressure on the Fed, shaking confidence in the central bank’s independence and clouding its policy outlook.
Bessent didn’t hold back. He dismissed the idea that tariffs are fueling inflation, pushing back hard against the Fed’s narrative. “They’re fearmongering over tariffs,” he said, insisting inflation is under control. Echoing the Trump administration’s stance, Bessent made the case for lower interest rates to boost economic growth. He argued that a decrease in interest rates would unlock the mortgage market, giving buyers a chance at affordability and reviving stalled housing activity.
His remarks highlighted the deepening divide between the White House and the Fed, with the administration and central bank increasingly at odds over how to steer the economy.
In Japan, the fallout from Sunday’s election is already beginning to reshape expectations around fiscal policy. With the opposition gaining momentum in the upper house, pressure is building for expanded government spending and potential tax cuts moves that could strain public finances and weigh further on the Yen.
Looking ahead, attention now turns to key economic data scheduled for later this week, which could inject fresh volatility into USD/JPY. On Thursday, Japan will release the Jibun Bank Flash Manufacturing Purchasing Managers Index (PMI). The same day, the US will publish its preliminary S&P Global PMI figures for July, offering a glimpse into business activity across manufacturing and services. Meanwhile, Friday’s Tokyo Consumer Price Index (CPI) will be closely watched for signs of inflation stickiness, with any upside surprise likely to reinforce expectations for further policy tightening by the Bank of Japan. Together, these releases could play a pivotal role in shaping near-term direction for the Yen.
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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