Japanese Yen holds range amid Japanese holiday, dovish BoJ signals

Japanese holiday keeps trading light, while the BoJ is expected to hold rates steady in October.
Softening US consumer sentiment and cooling Fed rate hike expectations weigh on the US Dollar.
Resurfacing Middle East tensions add broader macroeconomic uncertainty, keeping traders cautious ahead of key US inflation data.

USD/JPY depreciates after registering modest gains in the previous trading day, hovering around 158.10 during Asian hours on Monday. The pair may see limited movement due to thin trading conditions as Japanese markets are closed for the Sports Day public holiday.

Análisis de TMGM: noticias de mercados financieros, calendario económico e información del mercado

Ahead of the Bank of Japan (BoJ) October 29–30 meeting, policymakers will review additional third-quarter data expected to show resilient exports alongside elevated costs for businesses and households. However, a back-to-back interest rate increase is unlikely following their September hike.

BoJ Governor Kazuo Ueda noted that rapid tightening paces were typically seen in North America and Europe during 2022 following pandemic-related supply chain disruptions and a strong demand recovery. Market participants currently anticipate the central bank will raise the overnight interest rate target to 1.50% from 1.25% in December or January, marking the seventh increase in this cycle, before potentially raising it further to 1.75% in March or April.

Meanwhile, the USD/JPY pair lost ground as the US Dollar (USD) faced headwinds from softening domestic economic sentiment. The University of Michigan's Consumer Sentiment Index dropped to 46.3 in October from 48.1 in September, falling short of the market expectation of 47.6. Investors are now looking ahead to key inflation metrics, with the September Consumer Price Index (CPI) and Producer Price Index (PPI) scheduled for release on Wednesday and Thursday.

Monetary policy expectations for the Federal Reserve (Fed) remain cautious, with CME FedWatch indicating only a 17.7% chance of a rate hike of at least 25 basis points this month, down from 24.4% a week prior. Conversely, market participants are pricing in an 84.1% probability of a hike at the Fed's December meeting. Adding to broader macro uncertainty, energy market concerns resurfaced after US President Donald Trump indicated he was considering joining Saudi Arabia in its campaign against Iran-backed Houthi militants in Yemen following another deadly attack on Riyadh's international airport.

Higher US real yields underscore growth and rate expectations

Nordea’s Sara Midtgaard notes that the “recent rise in US Treasury yields has largely reflected higher expected short-term real rate, rather than a large increase in the term premium.” She explains that “real yields are the returns investors require after accounting for inflation” and points out that they “tend to rise when markets expect stronger real growth or a higher path for real interest rates,” underlining how the latest move in yields is being driven more by shifting growth and policy expectations than by a repricing of longer-term risk.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese 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.

How does broader risk sentiment impact the Japanese Yen?

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.

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