Japanese Yen falls as attention turns to Fed and BoJ monetary policy meetings

• Broad Japanese Yen weakness leaves USD/JPY trading with an upward bias.
• Unchanged interest rates are widely anticipated when the Fed and BoJ meet this week.
• With additional tightening expected in December, markets remain focused on policymakers’ guidance.

At around 157.42 at the time of writing, USD/JPY is trading with an upward bias on Monday, having touched 156.08 on Friday, its lowest level since 18 September. Broad weakness in the Japanese Yen (JPY) against its major counterparts is supporting the pair, alongside a stronger US Dollar (USD).

After last week’s decline, the US Dollar is regaining some stability. Concerns surrounding AI-related investments had encouraged demand for government bonds, driving US Treasury yields down. Trading near 101.91, the US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, has recovered from last week’s low of 101.45, a level last seen on 1 October.

Monday’s bond market shows a modest rise in shorter-dated yields, whereas longer-dated yields are broadly steady close to their recent lows. The yield on the benchmark 10-year US Treasury is around 4.98%.

Fed and BoJ decisions bring policy guidance into focus

Wednesday brings the Federal Reserve’s (Fed) interest rate decision, with the Bank of Japan (BoJ) following on Friday. Expectations are firmly for both to keep rates unchanged. The Fed increased rates by 25 basis points (bps) in September, while the BoJ implemented a cumulative 50 bps of tightening earlier this year as the Middle East energy shock intensified inflationary pressures.

For December, however, traders expect both central banks to raise rates again. Since pauses this week are largely anticipated, their policy statements and comments from Fed Chair Kevin Warsh and BoJ Governor Kazuo Ueda will be scrutinised for indications of when further tightening might come and how quickly it could proceed.

Expectations of additional tightening are underpinned by recent inflation readings in the United States and Japan. September’s US headline CPI rose to 3.7% YoY from 3.4%, and annual Producer Price Index (PPI) inflation reached 6.3%, compared with 5.6% in August. Japanese inflation excluding fresh food climbed from 1.7% to 2.1%, surpassing the BoJ’s 2% target. Excluding both fresh food and energy, inflation increased from 1.9% to 2.4%.

Firmer inflation supports Yen as expected BoJ pause shifts attention to December

According to Brown Brothers Harriman strategists, the BoJ is “widely expected to keep rates on hold at 1.25% and assess September’s 25bps hike before tightening again.” Looking back to September, they point to BoJ Governor Kazuo Ueda’s warning that he “warned that rapid rate hikes could unsettle asset prices,” alongside his caution that “it could take some time to confirm that 2% inflation is entrenched.”

Nevertheless, BBH’s assessment is that “firmer underlying inflation leaves scope for a more hawkish Outlook Report, lifting BoJ rate expectations in favor of JPY.” As evidence of the change in expectations, the strategists note that “the swaps curve price in 75% odds of a 25bps BoJ rate hike to 1.50% at the December 18 meeting and nearly 75bps of tightening in the next twelve months.”