Japanese Yen strengthens due to BoJ rate hike bets, weaker US Dollar
- Japanese Yen gains ground ahead of an expected 25-basis-point BoJ rate hike on Friday.
- Japanese officials emphasize economic stability, budget control, and achieving a sustainable 2% inflation target.
- US Dollar weakens despite the Federal Reserve raising rates by 25 basis points to curb persistent inflation.
USD/JPY depreciates after three days of gains, trading around 155.80 during the European session on Thursday. The pair loses ground as the Japanese Yen (JPY) advances on market expectations of a 25-basis-point interest rate hike by the Bank of Japan (BoJ) on Friday.
Japanese officials offered cautious remarks on Thursday, with Economy Minister Minoru Kiuchi stating that the government aims to balance economic strength with fiscal sustainability, though he declined to comment directly on interest rates. Finance Minister Satsuki Katayama noted that officials will review budget requests and manage debt issuance to maintain market credibility, while expressing the expectation that the central bank will steer policy appropriately to achieve a stable 2% inflation target.
Meanwhile, the USD/JPY pair faces downward pressure as the US Dollar (USD) holds losses despite the potential for further Federal Reserve policy tightening. The Fed recently raised the federal funds rate by 25 basis points to a target range of 3.75% to 4.00%, marking its first rate increase in three years and aligning with market expectations. Policymakers also signaled that another hike remains possible before the end of the year.
Explaining the move, Fed Chair Kevin Warsh stated that the decision was driven by inflation remaining too high for too long, describing the action as a sober and responsible step to curb price pressures while keeping future increases on the table. Following these comments, money markets priced in roughly a 51% probability of another Fed rate hike at the October meeting, according to the CME FedWatch tool.
Fed dots signal cautious path for rates and core inflation
Analysts at MUFG caution against over-interpreting the latest Fed projections, arguing that “we possibly shouldn’t read too much into the median dot levels and those levels could and very likely will change as developments unfold moving forward.” They highlight that the “4.125% median dot for 2026 and 2027 points to another hike and then no cuts until 2028,” when the median dot “drops by just 25bps and then by another 25bps in 2029 to 3.625%.” MUFG characterises this as “a very cautious removal of the two hikes pencilled in for this year” and notes that it “certainly implies a faster reduction in core CPI will require more than just one additional hike.”
Technical Analysis: USD/JPY remains above 155.50 near nine-day EMA
In the daily chart, USD/JPY trades at 155.80, keeping a bearish near-term bias as spot holds below the 50-day Exponential Moving Average (EMA). Price is, however, stabilizing above the nine-day EMA, hinting at some short-term consolidation rather than an immediate breakdown. The 14-day Relative Strength Index (RSI) at 43.69 stays in neutral territory, suggesting downside pressure persists but without oversold conditions, while the FXS Fed Sentiment Index around 151.79 provides a supportive backdrop that has yet to translate into a bullish reclaim of the longer-term trend.
On the topside, the 50-day EMA at 158.17 is the first meaningful resistance, and the broader bearish tone would likely remain intact while USD/JPY trades below this barrier. On the downside, initial support is seen at the nine-day EMA near 155.45, with the recent price pivot at 155.80 acting as a fragile floor; a sustained move beneath these levels would expose the sentiment anchor around 151.79 as the next support area, opening room for a deeper corrective leg.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.