- USD/JPY is declining slightly to around 146.50 amid weakness in the US dollar.
- The Fed is widely expected to begin cutting interest rates in September.
- Japan’s robust GDP growth in the second quarter has increased expectations for further interest rate hikes by the BoJ.
The USD/JPY pair is showing a subdued performance at 146.50 in Tuesday’s European session. The pair is declining slightly but remains higher during Monday’s trading session as investors focus on U.S. Federal Reserve (Fed) Chairman Jerome Powell’s speech at the Jackson Hole (JH) Symposium on August 22-23.
Investors would be waiting for a predefined interest rate path from Fed Chairman Powell, as rate cuts in September seem certain. Market participants would also want to know whether the Fed will start the monetary easing cycle with an aggressive or a gradual approach.
Market sentiment remains optimistic as the Fed is widely expected to move toward normalizing monetary policy in September. S&P 500 futures posted some losses in the European session. Risk-on currencies are outperforming the US dollar (USD). The US dollar index (DXY), which tracks the greenback’s value against six major currencies, continues to slide to a multi-month low of 101.80.
In terms of economic data, investors will focus on preliminary US S&P Global Purchasing Managers’ Index (PMI) data for August, due to be released on Thursday.
Meanwhile, the Japanese yen is performing well as positive gross domestic product (GDP) growth in the second quarter has opened up scope for further tightening of the Bank of Japan’s (BoJ) monetary policy this year. The Japanese economy grew at a brisk pace of 0.8%, against estimates of 0.5%. In the first quarter, the economy contracted sharply.
Frequently asked questions about the Japanese yen
The Japanese yen (JPY) is one of the most traded currencies in the world. Its value is largely determined by the performance of the Japanese economy, more specifically by the policies of the Bank of Japan, the difference between Japanese and US bond yields or the risk appetite of traders, among other factors.
One of the Bank of Japan’s responsibilities is currency control, so its actions are crucial for the yen. The BoJ has sometimes intervened directly in foreign exchange markets, generally to lower the value of the yen, although it often refrains from doing so due to political concerns among its major trading partners. The BoJ’s current ultra-loose monetary policy, based on massive economic stimulus, has led to a depreciation of the yen against its major counterpart currencies. This process has recently worsened due to a growing policy divergence between the Bank of Japan and other major central banks, which have opted to raise interest rates sharply to combat decades of high inflation.
The BoJ’s stance of maintaining its ultra-loose monetary policy has led to a growing divergence in its policies with other central banks, particularly the US Federal Reserve. This is leading to a widening of the spread between the US and Japanese 10-year bonds, favoring the US dollar against the Japanese yen.
The Japanese yen is often viewed as a safe haven asset. This means that during times of market stress, investors are more likely to put their money into the Japanese currency because it is seen as reliable and stable. Turbulent times are likely to strengthen the yen’s value against other currencies that are considered riskier.
