USD/JPY rallies to near 144.00 as BoJ delivers diplomatic policy guidance
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Sagar Dua
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USD/JPY rallies to near 144.00 as BoJ delivers diplomatic policy guidance

  • USD/JPY surges above 144.00 as BoJ refrains from committing pre-defined rate hikes in this year.
  • Japan’s National CPI rose to 3% in August.
  • Traders see the Fed cutting interest rates further by 75 bps to 4.00%-4.25%.

The USD/JPY delivers a sharp rally to near 144.00 in Friday’s European session. The asset strengthens as the Japanese Yen (JPY) weakens after the Bank of Japan’s (BoJ) monetary policy announcement. The BoJ kept interest rates in the range of 0.15%-0.25%, as expected, but did not endorse the need of more hikes in the remaining year, which was widely anticipated by market participants.

BoJ Governor Kazuo Ueda said, "Our decision on monetary policy will depend on economic, price and financial developments at the time. Japan's real interest rates remain extremely low. If our economic and price forecasts are achieved, we will raise interest rates and adjust the degree of monetary support accordingly," at the press conference.

Going forward, market speculation for more BoJ rate hikes is expected to remain firm as the Japan’s National Consumer Price Index (CPI) data for August came in higher at 3% than 2.8% in July. The National CPI data excluding fresh food grew expectedly by 2.8%, faster than the prior release of 2.7%.

Meanwhile, a mild recovery in the US Dollar (USD) has also pushed the asset higher. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, bounces back to near 100.85 from the intraday low of 100.40.

The near-term outlook of the US Dollar is expected to remain uncertain as traders expect the Federal Reserve (Fed) to continue with an aggressive policy-easing cycle. The CME FedWatch tool shows that the central bank will reduce interest rates further by 75 basis points (bps) in the remaining two policy meetings this year.

The Fed delivered its first interest rate cut decision in more than four years on Wednesday in which it cut its key borrowing rates by 50 bps to 4.75%-5.00%.

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.