Japanese Yen Gains Momentum as BoJ Hawkish Outlook Contrasts with Fed’s Dovish Stance
Japanese Yen Gains Momentum as BoJ Hawkish Outlook Contrasts with Fed’s Dovish Stance
The Japanese Yen (JPY) has been strengthening for the second consecutive day, driven by a series of hawkish remarks from Bank of Japan (BoJ) Governor Kazuo Ueda. This contrasts the dovish tone set by Federal Reserve (Fed) Chair Jerome Powell, creating a divergence in policy outlooks that has led to a depreciation of the US Dollar (USD) against the Yen.
BoJ’s Hawkish Shift
The appreciation of the Yen began after BoJ Governor Ueda made a significant speech in the Japanese Parliament on Friday. Ueda indicated that the central bank is open to raising interest rates further if economic projections align with expectations. This statement comes on the heels of July’s National Consumer Price Index (CPI) inflation data, which remained at its highest level since February, underscoring the BoJ’s hawkish stance.
Japan’s National CPI increased by 2.8% year-on-year in July, marking the third consecutive month at this level and reinforcing the BoJ’s commitment to its inflation-targeting policy. Additionally, the National CPI excluding Fresh Food rose by 2.7%, the highest reading since February, in line with market expectations. This persistent inflationary pressure has added weight to Ueda’s comments, suggesting that the BoJ may need to adjust its monetary policy further to keep inflation under control.
In his address to Parliament, Ueda emphasized that the BoJ is “not considering selling long-term Japanese government bonds (JGBs) as a tool for adjusting interest rates.” He clarified that any reduction in JGB purchases would only account for about 7-8% of the balance sheet, a relatively modest decrease. Ueda added that if the economy aligns with their projections, there could be a phase where they might adjust interest rates slightly further, signaling a potential shift in the BoJ’s policy approach.
USD/JPY Daily Price Chart
Source: TradingView, prepared by Richard Miles
US Dollar Under Pressure
Meanwhile, the US Dollar has been losing ground, largely due to rising expectations of a rate cut by the Federal Reserve. Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium hinted at a potential shift in policy, with Powell stating, “The time has come for policy to adjust.” Although Powell did not specify the timing or size of potential rate cuts, his comments have fueled speculation that the Fed may lower interest rates as early as September.
Traders are now anticipating a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting, with the CME FedWatch Tool indicating that markets are fully pricing in this possibility. The dovish tone set by Powell has been further reinforced by remarks from other Fed officials. For instance, Philadelphia Fed President Patrick Harker emphasized the need for the US central bank to lower interest rates gradually, while Chicago Fed President Austan Goolsbee noted that monetary policy is currently at its most restrictive, with the Fed now focusing on achieving its employment mandate.
This divergence in policy outlooks between the BoJ and the Fed has created a challenging environment for the USD/JPY pair. As the Yen strengthens on the back of the BoJ’s hawkish stance, the US Dollar is under pressure due to rising expectations of a Fed rate cut, leading to a decline in the USD/JPY exchange rate.
Technical Analysis: USD/JPY
The USD/JPY pair has been trading around 143.90, reflecting the impact of these contrasting policy signals. A technical analysis of the daily chart shows that the pair is positioned below a downtrend line, indicating a bearish bias. The 14-day Relative Strength Index (RSI) remains slightly above 30, which suggests that the bearish trend may continue, but there is still some room for a potential rebound.
On the downside, the USD/JPY pair could find support around the seven-month low of 141.69, recorded on August 5. A break below this level could open the door for further declines toward the throwback support level at 140.25, a key area that could determine the next phase of the bearish trend.
In terms of resistance, the USD/JPY pair faces immediate barriers at the downtrend line around the psychological level of 145.00. A breakthrough above this level could lead the pair to test the nine-day Exponential Moving Average (EMA) at 145.74. If the pair manages to clear this resistance, it could explore the region around the throwback-turned-resistance at the 154.50 level, although this scenario appears less likely given the current market conditions.
Market Sentiment and Future Outlook
The current market sentiment reflects a cautious approach by traders as they weigh the implications of the BoJ’s hawkish stance against the Fed’s dovish outlook. The contrasting approaches of the two central banks have created uncertainty, with traders closely monitoring upcoming economic data and policy announcements to gauge the future direction of the USD/JPY pair.
Bloomberg reported that Philadelphia Fed President Patrick Harker reiterated the need for the Fed to lower interest rates gradually, signaling a cautious approach to policy adjustments. Reuters also highlighted comments from Chicago Fed President Austan Goolsbee, who noted that the Fed’s monetary policy is currently at its most restrictive, suggesting that any future rate cuts will be carefully considered.
The US Composite PMI, which edged down to 54.1 in August from 54.3 in July, remains above market expectations of 53.5, indicating continued expansion in US business activity. However, the FOMC Minutes for July’s policy meeting revealed that most Fed officials agreed that a rate cut is likely at the upcoming September meeting, provided that inflation continues to cool.
As the Yen continues to gain ground and the US Dollar faces headwinds, traders will be closely watching the next moves by both the BoJ and the Fed. The outcome of these central bank decisions will likely determine the future direction of the USD/JPY pair and set the tone for global currency markets in the coming months.
