Japanese Yen weakens as Fed rate hike looms
- USD/JPY edges higher to around 154.55 in Tuesday’s early Asian session.
- Traders brace for the Fed’s first interest rate hike in more than two years.
- BoJ is set to hike its policy rate at the September policy meeting on Friday.
The USD/JPY pair gains ground to near 154.55 during the early Asian session on Tuesday. The US Dollar (USD) strengthens against the Japanese Yen (JPY) as traders ramp up their bets on a US interest rate hike in September. The US Federal Reserve (Fed) interest rate decision will take center stage later on Wednesday.
US Consumer Price Index (CPI) rose in August, while a key measure of underlying inflation posted its largest gains in four months, data showed on Friday. This report has reinforced US rate hike expectations, lifting the Greenback against the JPY.
Money markets on Monday pointed to roughly 92.4% odds of a rate hike, up from around 60% a week ago, according to the CME FedWatch tool.
“The U.S. dollar has strengthened modestly at the start of this week, encouraged by building expectations that the Fed will begin tightening monetary policy,” said Lee Hardman, senior currency analyst at MUFG.
The Bank of Japan (BoJ) is also expected to raise the interest rates at its September policy meeting on Friday. The last time the BoJ policy interest rate stood at 1.25% was in April 1995. Traders will closely monitor BoJ Governor Kazuo Ueda's speech on the pace of future rate hikes and how far the central bank could take rates under the current tightening cycle.
"A 25 bps hike is already almost fully priced," said MUFG analysts. ”For the yen to strengthen further, the BOJ will have to signal that they are planning to stick to the faster pace of hikes,” they added.
Yen support builds as BoJ gains political room to normalize
Analysts at DBS note that speculative positioning has shifted meaningfully in favour of the Yen, with “speculators [having] unwound their short JPY positions following July’s joint US-Japan currency intervention and a shift in expectations towards further Bank of Japan tightening.” They add that the policy backdrop has also become more supportive of normalization, arguing that “by implicitly pushing back against Prime Minister Sanae Takaichi’s fiscal instincts, Bessent gave the BoJ greater political room to normalize interest rates,” reinforcing the case for a more hawkish stance from the central bank.
Technical Analysis: USD/JPY keeps a bearish bias below the 100-day SMA
In the daily chart, USD/JPY holds well below the 20-day Bollinger simple moving average and the 100-day moving average, keeping the near-term bias bearish despite a modest rebound from recent lows. The Relative Strength Index (14) has recovered from oversold territory toward 36, which hints at easing downside momentum but does not yet challenge the broader bearish structure.
On the topside, initial resistance emerges at the Bollinger midline near 157.15, with the 100-day simple moving average around 159.58 adding a stronger cap before the upper Bollinger band near 162.05. On the downside, the lower Bollinger band at roughly 152.25 forms the next notable support zone, and a clear break below this floor would reopen the path toward deeper yen strength and a continuation of the corrective phase.
(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.