Japanese Yen Loses Ground as Focus Turns to Fed and BoJ Monetary Policy Meetings

• Broad-based weakness in the Japanese Yen lends an upward bias to USD/JPY.
• This week's Fed and BoJ meetings are widely expected to end with interest rates on hold.
• With further tightening anticipated in December, markets are watching policymakers' guidance closely.

An upward bias prevails in USD/JPY on Monday, supported by weakness in the Japanese Yen (JPY) against its major counterparts and a stronger US Dollar (USD). The pair is trading near 157.42 at the time of writing, following Friday's decline to 156.08, its lowest level since 18 September.

Some stability has returned to the US Dollar after it finished last week lower. Concerns surrounding AI-related investments had fuelled demand for government bonds, driving US Treasury yields down. Having dropped to 101.45 last week, its lowest reading since 1 October, the US Dollar Index (DXY) is now trading near 101.91. The index measures the Greenback against a basket of six major currencies.

Monday's Treasury market shows a mixed yield picture: shorter-dated yields are inching up, whereas longer-dated yields are broadly steady close to their recent lows. Around 4.98% is the current yield on the benchmark 10-year US Treasury.

What will the Fed and BoJ policy announcements signal?

Wednesday brings the Federal Reserve's (Fed) interest rate decision, with the Bank of Japan (BoJ) following on Friday. An unchanged-rate outcome is widely anticipated from both central banks. The Fed increased rates by 25 basis points (bps) in September, while the BoJ's cumulative tightening earlier this year amounted to 50 bps, as the Middle East energy shock intensified inflationary pressures.

December, however, is expected by traders to bring further rate increases from both central banks. Since pauses are largely anticipated this week, markets will scrutinise the policy statements and comments from Fed Chair Kevin Warsh and BoJ Governor Kazuo Ueda for indications of when, and how quickly, further tightening could follow.

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

Can firmer inflation support the Yen as a BoJ pause puts December in focus?

A pause to evaluate the previous increase is the prospect outlined by Brown Brothers Harriman strategists, who say the BoJ is “widely expected to keep rates on hold at 1.25% and assess September’s 25bps hike before tightening again.” Recalling BoJ Governor Kazuo Ueda's September remarks, they note that he “warned that rapid rate hikes could unsettle asset prices,” and cautioned that “it could take some time to confirm that 2% inflation is entrenched.”

Nevertheless, the case made by BBH 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 shift in expectations, the strategists point out 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.”