• Tokyo CPI accelerated to 2.7% YoY in September, boosting expectations for Bank of Japan policy hawkishness.
  • The US Dollar weakened as traders priced in under a 28% chance of an October Fed rate hike.
  • High US Treasury yields and lingering December hike bets may limit further downside for the Greenback.

USD/JPY declines after two days of gains, trading around 157.90 during Asian hours on Friday. The Japanese Yen (JPY) gained momentum following stronger-than-expected inflation data from Tokyo, putting downward pressure on the pair.

According to the Statistics Bureau of Japan, the headline Tokyo Consumer Price Index rose 2.7% year-over-year in September, accelerating from 1.9% in the previous month. Key underlying inflation metrics also saw sharp increases: the CPI excluding Fresh Food climbed to 2.7% YoY (beating expectations of 2.4% and the prior 1.8%), while the core-core index excluding both Fresh Food and Energy jumped to 3.0% YoY from 2.0%.

Japanese Finance Minister Satsuki Katayama announced plans on Friday to intensify efforts toward a Japanese adaptation of government efficiency reviews, focusing specifically on state subsidies and funds. Katayama highlighted that roughly 200 existing funds, valued at approximately 7 trillion yen, will be targeted as part of this initiative to streamline public spending.

In parallel comments, Economy Minister Minoru Kiuchi emphasized the importance of ongoing, close communication between the government and the Bank of Japan regarding future economic policy. Kiuchi noted that Japan has moved past the need for extraordinary monetary stimulus, pointing to the BoJ’s prior exit from yield curve control as evidence of this transition, while refraining from further direct remarks on monetary policy decisions reserved for the central bank.

Adding to the USD/JPY pair's decline is a broader softening in the US Dollar (USD), driven by scaled-back expectations for immediate Federal Reserve (Fed) rate hikes. Markets are currently pricing in less than a 28% chance of a Fed rate increase at the October meeting, according to the CME FedWatch Tool.

Despite the recent weakness, the Greenback may retain potential support. Persistent inflation concerns linked to elevated energy costs, alongside lingering expectations for a Fed rate hike in December, could help the currency regain traction. Furthermore, US Treasury yields remain near multi-decade highs, bolstered by resilient domestic economic performance, expectations of sustained monetary tightening, and growing worries surrounding the US government's long-term fiscal debt trajectory.

Market participants remain focused on upcoming macroeconomic releases to gauge the future path of monetary policy. Attention now shifts to the pending US Nonfarm Payrolls report, where economists anticipate job gains to moderate to 90,000 from the previous month's 162,000, while the unemployment rate is projected to hold steady at 4.1%.

Dollar strength drives USD/JPY toward key technical resistance

Strategists at Brown Brothers Harriman highlight the impact of broad Dollar strength on the pair, noting that "USD/JPY surged to its 200-day moving average at 158.49 on broad USD strength." In their view, the move brings the cross into a consolidation zone, with the bank expecting "USD/JPY to hold within a 155.00-160.00 range in the near term."

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 BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

Over the last decade, 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 supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

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.

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.