USDJPY bears are taking advantage of the divergence in monetary policy between the Fed and the Bank of Japan. Carry traders and capital outflows are also providing support. Let’s discuss these topics and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The Japanese stock market is attracting capital.
- The US dollar is the main funding currency for carry trades.
- The Fed will cut rates, while the BoJ will raise them.
- Short trades on USDJPY opened at 148 can be increased.
Weekly Fundamental Forecast for Yen
Donald Trump’s policies have scared investors away from the US stock market. Which investment destination will they choose? The answer to this question is more critical for Forex currencies than central bank monetary policy. The Nikkei 225 index has rallied to record highs, the Bank of Japan has continued its cycle of monetary tightening, and the yen is losing its status as a funding currency in carry trades. Against this backdrop, the USDJPY pair may resume its downtrend.
USDJPY and Nikkei 225 Performance
Source: Trading Economics.
In early August, foreign investors unexpectedly broke their 17-week streak of purchasing Japanese stocks. Following a slight pullback, the Nikkei 225 index surged. Over the trailing month, it has gained almost 10%, significantly outperforming other global stock indices.
Japan saw capital inflows after Tokyo concluded the trade agreement with Washington. However, they view the $550 billion investments differently. Japan asserts that a mere 1–2% of this amount will be allocated to investments in the US economy, with the bulk of it being loans. Moreover, failure of the United States fails to fulfill the terms of the agreement, it will not receive even that amount. The US administration has a different perspective on the matter. However, the US leader has established policies that are now in effect and cannot be reversed.
The US administration is taking deliberate steps to weaken the dollar to give US companies a competitive edge in the global market. As a result, the US dollar emerges as a more appealing funding currency for carry traders when compared to the Japanese yen. The yen’s withdrawal from carry trade operations has pushed the USDJPY exchange rate lower.
Performance of Carry Trades
Source: Bloomberg.
The divergence in monetary policy between the Fed and the Bank of Japan is also favoring USDJPY bears. The minutes of the BoJ’s latest meeting noted that the regulator needs two to three months to assess the impact of the US trade policy on the Japanese economy. As a result, the monetary tightening cycle will likely persist.
On the other hand, the Fed is committed to supporting the labor market by lowering the federal funds rate. Moreover, the US regulator is poised to take an aggressive stance. The derivatives market estimates the likelihood of three rate cuts at 50% in 2025. Treasury Secretary Scott Bessent and BlackRock are urging the central bank to reduce borrowing costs by 50 basis points in September.
Weekly USDJPY Trading Plan
Divergence in monetary policy, capital outflows from the US to Japan, and the shift in the status of the main funding currency in carry trade operations from the yen to the US dollar suggest that the USDJPY pair will continue its downtrend. Short trades formed at 148 can be kept open and increased.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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