Japanese Yen weakens on BoJ's lack of hawkish guidance, eyes on potential intervention
- USD/JPY gains traction to near 157.55 in Tuesday’s early Asian session.
- BoJ's lack of hawkish guidance after the rate hike last week weighs on the Japanese Yen.
- Traders are pricing in a 56.5% chance of a Fed rate hike of at least 25 bps in October.
The USD/JPY pair gathers strength to around 157.55 during the early trading hours on Tuesday. A lack of explicitly hawkish guidance from the Bank of Japan (BoJ) after the rate hike last week undermines the Japanese Yen (JPY) against the US Dollar (USD). Federal Reserve (Fed) policymakers are set to speak later on Tuesday, including John Williams, Philip Jefferson and Thomas Barkin.
The BoJ decided to raise the interest rate by 25 basis points (bps) last week to its highest level in 31 years at 1.25%, in a decision split 7-2 among policymakers. Swaps markets have priced in less than 20% for the next policy meeting at the end of October, with a 90% chance of a rate increase priced in for the December policy decision.
Traders remain on high alert for currency intervention from Japanese authorities to prop up the JPY. The Nikkei newspaper reported that Japanese officials conducted rate checks. A rate check involves authorities asking banks for currency quotes to gauge market conditions, which traders view as a precursor to currency intervention.
A hawkish stance from the Fed could lift the Greenback in the near term. St. Louis Fed President Alberto Musalem said on Monday that the US central bank will likely need to hike interest rates further to lower inflation resulting from strong demand as well as a commodity price shock that has moved beyond oil.
Traders are now pricing in roughly 56.5% odds for a rate hike of at least 25 bps at the Fed's October meeting, according to the CME FedWatch tool, up from 43.5% a week earlier.
Yen steadies as BoJ rate check tempers USD/JPY downside
Analysts at MUFG/BTMU highlight that the catalyst for the Yen’s late-Friday rebound was “reports that the BoJ had conducted a rate check during the New York trading session,” which they say sent “a clear signal that they are prepared to intervene again if the yen continues to weaken.” MUFG/BTMU add that this “rate check should help to dampen market expectations for how much the yen will be allowed to weaken in the near-term as USD/JPY moves closer to the 160.00-level,” effectively reinforcing the perception of an official ceiling on further Yen depreciation in the current environment.
Musalem flags need for earlier, incremental hikes as inflation risks stay elevated
The Fed's Musalem delivers a distinctly hawkish tone, with an 8/10 FXS Speechtracker score standing above the 7.4/10 historical average and underscoring a stronger-than-usual push for tighter policy. Musalem warns that without further policy restraint inflation is likely to remain well above the 2% target over the next 18 months, stressing that even excluding supply shocks underlying price pressures are still too high at up to 3%, while business contacts are planning price increases closer to 3%. The preference for “earlier and incremental” rate hikes, alongside a view that the labor market is near full employment and not the main inflation driver, reinforces the case for additional FED tightening and supports the Dollar on balance.
The FXS Fed Sentiment Index rises by 0.42 points to 149.96, cementing a firmly hawkish stance well above the neutral 100 threshold and aligning with the elevated FXS Speechtracker reading. This combination of a stronger-than-baseline speech score and a high FXS Fed Sentiment Index level signals persistent upside risks for U.S. yields and the Dollar, with markets likely to price in further rate increases rather than an imminent pivot.
Technical Analysis: USD/JPY remains capped below the 100-day SMA
In the daily chart, USD/JPY trades with a bearish near-term bias, as spot holds below the 100-day moving average (MA) and well under the upper Bollinger band. Price has slipped back above the Bollinger middle band support, hinting at some stabilization inside the volatility envelope, while the Relative Strength Index (14) around 52 suggests neutral-to-mildly positive momentum that does not yet challenge the prevailing downside structure.
On the topside, initial resistance is seen at the 100-day MA at 159.55, ahead of a secondary cap at the upper Bollinger band near 161.10. On the downside, immediate support aligns with the Bollinger middle band at 156.65, with a deeper floor at the lower Bollinger band around 152.18, where buyers would be expected to show more interest if the pair extends its decline.
(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.