USD/JPY is on a downward trend for the second day in a row, hovering around 141.20 during the Asian trading session. This decline is attributed to Bank of Japan (BoJ) board member Junko Nagakawa’s comments regarding potential adjustments to the central bank’s monetary easing policy.
Nagakawa mentioned that the BoJ may reconsider the extent of its monetary easing if economic conditions and inflation align with projections. Despite a rate hike in July, real interest rates remain negative, and accommodative monetary conditions persist. The BoJ is prepared to reevaluate its tapering plan if long-term rates rise during policy meetings.
The contrasting monetary policies of the BoJ and the US Federal Reserve are also contributing to the USD/JPY decline, prompting the unwinding of carry trades and increasing demand for the Japanese Yen. BoJ Governor Kazuo Ueda reaffirmed the central bank’s commitment to raising interest rates, contingent on the Japanese economy meeting forecasts through FY2025.
Meanwhile, the US Dollar is subdued as Treasury yields continue to decrease ahead of the release of the US Consumer Price Index (CPI) data. This upcoming inflation report will provide insights into the potential magnitude of the Fed’s interest rate cut in September. Recent data on the US labor market has raised doubts about the possibility of a significant rate cut by the Fed.
According to the CME FedWatch Tool, markets are fully pricing in a minimum 25 basis point rate cut by the Fed in September, with a slight decrease in the likelihood of a 50 basis point cut. The current probability stands at 31.0%, down from 38.0% a week ago.
Analysis:
The decline in USD/JPY is driven by the BoJ’s signaling of potential policy adjustments and the contrast in monetary policies between the BoJ and the Fed. This could lead to further weakening of the US Dollar against the Japanese Yen in the near term. Investors should monitor economic data releases and central bank statements for potential impact on currency pairs and investment decisions.