USD/JPY Outlook: Yen Faces Pressure Amid Strong US Dollar and Divergent Policy Paths

**USD/JPY Forecast: Japanese Yen Struggles as US Dollar Remains Strong on Economic Data and Central Bank Policies**
*Original source: Mitrade News, authored by Dolly Lenz*
*Expanded and updated with additional sources and insights*

The USD/JPY currency pair has been in the spotlight lately, driven by contrasting monetary policies of the United States and Japan, macroeconomic data from both economies, and overall market sentiment surrounding interest rates and inflation. As of mid-August 2023, the pair has been trading firmly above the psychological 145.00 level, with traders and investors watching closely as intervention risks by the Bank of Japan (BOJ) loom.

This article provides an in-depth look at the recent performance of USD/JPY, analyzes the key drivers behind the movement, and outlines the potential medium to long-term outlook for this major currency pair.

## Recent Performance of USD/JPY

The USD/JPY pair has risen significantly in 2023, recovering steep declines seen in late 2022, when Japan staged its first intervention in the currency markets in over two decades. As of August 2023, the pair has breached the 145.00 level multiple times, raising the possibility of further action from the Japanese authorities to contain the yen’s depreciation.

Recent data shows:

– The yen traded around 145.30 levels against the dollar at the time of writing.
– The USD/JPY has gained more than 10% year-to-date, with robust momentum since mid-June.
– Historical resistance at 146.00 is being tested, nearing levels that previously prompted official BOJ intervention in September and October 2022.

## Key Drivers Behind USD/JPY Movement

### 1. Divergence in Central Bank Policy

The primary narrative driving USD/JPY right now stems from the clear divergence between the Federal Reserve’s hawkish stance and the Bank of Japan’s ultra-loose monetary policy.

**US Federal Reserve:**
– The Fed has implemented 11 rate hikes since March 2022, bringing the federal funds rate to a range between 5.25% and 5.50%.
– The July 2023 FOMC meeting left the door open for further hikes should inflation remain elevated.
– US inflation data has shown signs of slowing but remains above the Fed’s target.
– US Treasury yields remain supported, benefiting the US dollar.

**Bank of Japan:**
– The BOJ, under Governor Kazuo Ueda, is maintaining a dovish policy framework, with interest rates still in negative territory (-0.10%).
– Yield Curve Control (YCC) remains intact, though the BOJ announced some tweaks in recent meetings to allow 10-year yields to rise closer to 1.0%.
– Such policy differences make the yen less attractive as investors shift funds toward higher-yielding US assets.

### 2. Japanese Inflation and Growth Data

Although inflation in Japan has trended higher in 2023, much of it has been driven by imported energy and food costs, not wage growth or domestic demand. This has allowed the BOJ to view the inflation as transitory and continue with its accommodative stance.

Recent data updates:

– Core inflation in Japan hit 3.3% YoY in July 2023 — above the BOJ’s 2% target for more than a year, but still considered insufficient for policy tightening.
– Real wages have continued to decline, highlighting weak consumer purchasing power and discouraging any monetary policy shift.
– The Japanese economy grew at 6.0% annualized in Q2 2023, but much of that was driven by net exports, not domestic demand.

### 3. Bank of Japan’s Tolerance and Intervention Risk

Despite maintaining easy monetary policy, the Bank of Japan does have limits in terms of how weak it will allow the yen to get.

Points to note:

– In 2022, the BOJ intervened when USD/

Read more on USD/CAD trading.

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