Market Data 
- USD/JPY trades with negative bias for the fourth straight day and hangs near the YTD low.
- The divergent Fed-BoJ policy expectations turn out to be a key factor weighing on the pair.
- Investors now look forward to next week’s key central bank event risks for a fresh impetus.
The USD/JPY pair weakens further below mid-141.00s during the Asian session on Friday and has now moved back closer to the YTD low touched earlier this week. Moreover, the fundamental backdrop seems tilted firmly in favor of bearish traders and supports prospects for an extension of a well-established downtrend witnessed over the past two months or so.
The US Dollar (USD) dives to a fresh weekly low in the wake of rising bets for a more aggressive policy easing by the Federal Reserve (Fed) next week, bolstered by Wednesday’s release of softer-than-expected US Producer Price Index (PPI) print. In fact, the markets are now pricing in over a 40% chance that the US central bank will lower borrowing costs by 50 basis points at the end of the September meeting. This keeps the US Treasury bond yields depressed near the 2024 low, which is seen weighing on the buck and dragging the USD/JPY pair lower.
The Japanese Yen (JPY), on the other hand, continues to draw support from the Bank of Japan’s (BoJ) hawkish signals, indicating that it will raise interest rates further if the economic outlook aligns with the forecasts. In fact, BoJ board member Naoki Tamura said on Thursday that the path towards ending the easy policy is still very long. This marks a big divergence in comparison to dovish Fed expectations, which, in turn, prompts further unwinding of the Japanese Yen (JPY) carry trades and contributes to the offered tone surrounding the USD/JPY pair.
The aforementioned fundamental backdrop suggests that the path of least resistance for spot prices remains to the downside, though traders might prefer to move to the sidelines ahead of the key central bank event risks next week. The Fed is scheduled to announce its decision at the end of a two-day meeting next Wednesday. This will be followed by the BoJ policy update on Friday, which will determine the next leg of a directional move for the USD/JPY pair. Nevertheless, the pair remains on track to end deep in the red for the second successive week.
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 current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
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 supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
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.
