Japanese Yen steadies amid expansionary fiscal plans, rate hike uncertainty
- Japan’s Prime Minister Takaichi plans tax cuts funded without new bond issuances to reassure financial markets.
- Bank of Japan considers rate hikes as inflation exceeds target, but timing remains unclear.
- Safe-haven US Dollar demand may pressure JPY following escalating Middle East geopolitical conflict.
USD/JPY moves little after posting minor gains in the previous day, trading around 157.90 during Asian hours on Tuesday. The currency pair has steadied into a tight trading range following recent developments in Japanese fiscal policy.
Japan’s Prime Minister, Sanae Takaichi, is pushing forward with expansionary economic measures despite persistent concerns surrounding the weak Yen and government debt. In a recent parliamentary address, Takaichi pledged to lower the consumption tax on food products while reassuring financial markets that the government intends to secure necessary funding without issuing additional bonds.
Meanwhile, uncertainty lingers regarding the Bank of Japan's monetary trajectory. A summary of opinions from the central bank's September meeting highlighted growing anxiety that inflation could outpace the 2% target, keeping the prospect of another rate hike this year firmly on the table. However, with policy meetings set for October and December, the central bank provided little clarity on the exact timing of any future rate adjustments.
Looking ahead, the US Dollar (USD) could gain ground against the Yen due to increased demand for safe-haven assets driven by escalating geopolitical tensions. Reports from Xinhua News Agency indicate that Yemen’s Houthi group claimed responsibility for coordinated drone and missile strikes targeting Saudi Arabian military bases, an oil facility, and major airports. According to Houthi spokesman Yahya Saree, a successful strike on King Khalid International Airport in Riyadh disrupted local air traffic, injecting fresh volatility into global financial markets.
HSBC highlights profit-led dynamics behind stubborn US inflation
Strategists at HSBC argue that US inflation, while widely blamed on “surging oil and computing costs, as well as the lingering impact of tariffs,” looks different when viewed through the lens of the gross value-added deflator. This measure, which captures “inflation generated by profits, wages, and non-labour related costs,” suggests that the latest acceleration in headline inflation “appears to have been driven mainly by stronger profit growth,” rather than purely by input cost pressures.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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