The USD/JPY pair gains ground to near 156.75 during the early Asian session on Monday. The Japanese Yen (JPY) softens against the US Dollar (USD) as traders have been disappointed with the slow and cautious pace of the Bank of Japan’s (BoJ) monetary tightening.
The BoJ raised its policy rate to 0.75% from 0.50%, the highest level in 30 years, at its December policy meeting. However, the Japanese central bank did not provide specific guidance on the pace of future hikes, which disappointed the market and weighed on the JPY.
On the other hand, the US Federal Reserve (Fed) is expected to cut the interest rates further in 2026, and US President Donald Trump openly pushes for a more dovish central bank chief. This, in turn, might undermine the Greenback against the JPY.
Trump said that he expects the next Fed Chairman to keep interest rates low and never “disagree” with him. The comments are likely to heighten concerns among investors and policymakers about Federal Reserve independence.
“The biggest factor for the dollar in the first quarter will be the Fed,” said Yusuke Miyairi, a foreign-exchange strategist at Nomura. “And it’s not just the meetings in January and March, but who will be the Fed Chair after Jerome Powell ends his term,” Miyairi added.
The Fed has cut rates three times this year, and traders anticipate two rate cuts next year. Financial markets are pricing in nearly an 18.3% chance the Fed will cut interest rates at its next meeting in January, according to the CME FedWatch tool.
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.
