Japanese Yen Weekly Forecast: Fed-BoJ Divergence Spearheads Continued Yen Weakness
Original article by James Hyerczyk | FX Empire
Overview
The Japanese Yen (JPY) remains under pressure as monetary policy divergence between the Federal Reserve (Fed) and the Bank of Japan (BoJ) continues to influence market dynamics. While the Fed maintains a relatively hawkish stance due to persistent inflation in the U.S., the BoJ is still implementing only modest changes to its ultra-accommodative monetary policy. This contrast is keeping the Yen on a weaker path relative to the U.S. dollar and other major currencies.
Last week, economic releases and central bank commentary supported a stronger dollar while hints from the BoJ failed to provide any significant support to the Japanese currency. The USD/JPY pair continues to drift toward previous highs, and unless there is a significant change in monetary expectations or strong intervention from Japanese authorities, the Yen is likely to weaken further.
Key Drivers This Week
1. Divergence in Monetary Policy
– The Fed is maintaining a hawkish outlook due to elevated U.S. inflation data. Although the central bank held rates steady, policymakers signaled fewer rate cuts than previously anticipated, keeping the dollar supported.
– The BoJ, on the other hand, raised its benchmark interest rate in March for the first time since 2007, but the pace of normalization has been notably slow. The central bank remains cautious and data-dependent, prioritizing steady wage growth and inflation stability before tightening further.
– This policy divergence continues to weigh heavily on the Yen. As U.S. bond yields rise and Japanese rates stay low, traders are increasingly betting against the Yen via carry trades.
2. Japanese Economic Data
– Japan’s economy remains fragile. First-quarter GDP figures were disappointing, showing an annualized contraction of 2 percent, largely due to weak household consumption and exports.
– Household spending in Japan fell by 1.2 percent year-over-year in April, marking the 14th straight monthly decline. Consumers are feeling the pinch of inflation and wage stagnation, impacting broader economic growth.
– Industrial production and exports also remain shaky. While export demand registered some modest improvement, particularly from the U.S., it was not enough to offset weakness in domestic consumption.
3. U.S. Inflation and Employment Data
– The latest Core Personal Consumption Expenditures (PCE) Index, the Fed’s preferred gauge of inflation, showed annual price increases of 2.8 percent—still significantly above the Fed’s 2 percent target.
– Monthly non-farm payroll data revealed robust job creation with over 270,000 jobs added in May, underlining continued strength in the U.S. labor market.
– These data points reinforce the Fed’s cautious stance and limit the possibility of a rate cut in the near term, thereby making U.S. assets more attractive than those in Japan and putting additional downside pressure on the Yen.
4. BoJ Comments and Yield Curve Control (YCC)
– Bank of Japan officials have issued mixed signals. While some members have hinted at the possibility of further tweaks to monetary policy, others caution against premature tightening.
– Governor Kazuo Ueda emphasized the need to assess whether inflation can remain sustainably at the BoJ’s 2 percent target before proceeding with more rate hikes.
– Traders are closely watching BoJ meetings for indications of adjustments to YCC or a reduction in bond purchases, both of which could impact Yen valuation.
5. Risk of Intervention by Japanese Authorities
– With USD/JPY trading near three-decade highs, speculation over direct intervention by Japanese authorities has intensified.
– In 2022, Japan intervened in currency markets to support the Yen when its depreciation created inflationary pressures via higher import prices.
– Japanese Finance Minister Shunichi Suzuki reiterated that the government is “watching currency markets with a sense of urgency” and that all options are on the table to ensure stability.
– However, unless there is a sharp and sudden drop
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