The Fed’s cautious approach supports the US dollar. Meanwhile, the Bank of Japan is in no hurry to raise rates, putting pressure on the yen. The divergence remains significant, and the USD/JPY rate is rising. Let’s discuss these topics and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The US administration is interfering in Japan’s policy.
- The BoJ is not signaling any rate hikes.
- The yen is falling amid a wide rate differential.
- Long trades on the USDJPY pair can be considered with targets at 154.5 and 156.2.
Weekly Fundamental Forecast for Yen
Scott Bessent said the government should give the Bank of Japan room to normalize monetary policy. Raising rates would anchor inflation expectations and prevent excessive yen volatility. At the same time, the US administration continues to pressure the Fed to lower rates, as it wants to see a weaker US dollar, but its plans have backfired after the central bank meetings.
The Fed has eased monetary policy twice in a row, yet the US dollar has risen instead of falling. The Bank of Japan left its overnight rate unchanged at 0.5%, but the USD/JPY pair rose to an eight-month high. Is monetary policy divergence not yielding the desired results?
Central Banks’ Interest Rates
Source: Bloomberg.
Regarding the Fed, market views have been reassessed. Before the September FOMC meeting, the derivatives market anticipated three rate cuts both in 2025 and 2026. However, the FOMC’s forecasts showed only three this year and one next year. As expected, the USD index rose. Then, the market erroneously began to believe its own expectations were reality. Investors raised the odds for a sharp rate cut in December to over 90%. However, Jerome Powell said that this decision was still up in the air, and the greenback rose again.
The yen weakened in response to the results of the Governing Board meeting due to the BoJ’s slowness. While the Fed claims to act in uncertainty due to the government shutdown, the Bank of Japan acts in uncertainty due to Donald Trump’s trade policy. The BoJ has made virtually no changes to its previous inflation and GDP forecasts, while Kazuo Ueda said that the risks of falling behind the curve on inflation by not raising rates had been reduced to zero.
The BoJ wants more data on wages and emphasizes the uncertainty in foreign economies. Coupled with unchanged forecasts, this could be interpreted as a reluctance to change monetary policy. The futures market has lowered the probability of an overnight rate hike in December to 50% and is shifting expectations to January, where the probability is 80%.
Japan’s Real Wages
Source: Bloomberg.
If the Bank of Japan continues to proceed slowly with monetary policy normalization and the Fed pauses the cycle, the interest rate divergence between the two countries’ debt markets will favor carry traders and USD/JPY bulls. Despite the US administration’s desire to see the opposite and Goldman Sachs’s forecast of a decline to 100 over the next 10 years, the pair will continue to surge.
Weekly USDJPY Trading Plan
Japan will likely ramp up its verbal interventions soon and consider currency interventions. Meanwhile, the gap between central bank interest rates allows investors to increase long trades opened above 150 on the USD/JPY pair with targets at 154.5 and 156.2.
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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