The Japanese yen fell against the U.S. dollar on Wednesday after the U.S. Federal Reserve adopted a hawkish stance, with most officials expecting one rate hike at the end of the year, and novel Fed Chairman Warsh reaffirmed the Fed’s commitment to its 2% inflation target. At the time of writing, USD/JPY is trading at 160.66 after rebounding from the intraday low of 160.11.
Yen weakens as Fed dots revive US yield advantage
Fed Chairman Kevin Warsh did not provide any information on the future policy path during his news conference, noting that he did not provide economic forecasts. Nevertheless, he stressed that inflation remains well above the Fed’s 2% target and said policymakers are unanimous in their commitment to restoring price stability.
As for the policy statement, Warsh said it was intended to present facts, not signal future guidance. He also unveiled plans to create task forces on communications, balance sheet, data sources, productivity, employment and inflation, among others, as part of an overhaul of the Federal Reserve’s current framework.
Referring to the U.S. central bank’s dual mandate, Warsh said policymakers do not face a “cruel choice” between achieving price stability or maximum employment. He admitted, however, that the central bank still had a lot to do to restore control over inflation.
Fed’s summary statement on monetary policy
In its statement, the Fed eliminated forward guidance. The Fed acknowledged that the economy continues to grow strongly despite uncertainty surrounding the conflict in the Middle East and noted that the labor market remains stable and the unemployment rate remains almost unchanged.
Moreover, “Inflation remains elevated compared to the Committee’s 2 percent target, partly reflecting supply shocks that have pushed up prices in some sectors, including energy. The Committee will ensure price stability.”
The Fed’s Summary Economic Outlook (SEP) shows that the median forecast calls for the federal funds rate to end at 3.8%, down from 3.4% in March. U.S. GDP is expected to grow 2.2% by the end of 2026, while core PCE, the Fed’s preferred measure of inflation, is expected to be 3.3%, 1.3% above the Fed’s 2% target.
USD/JPY Price Forecast: Technical Outlook
The USD/JPY rate increased by 0.14%, and the enhance was restricted by investors’ fears of possible intervention by the Bank of Japan (BoJ) in the currency market. A rise in U.S. Treasury yields pushed the pair higher, providing headwinds for the yen, which tends to be weakened by currencies with greater interest rate differentials, favoring the latter.
On the plus side, the first resistance is 161.00. Breaking the latter will reveal the level of 161.50 before 162.00. On the other hand, the first support will be the June 15 low at 159.73, ahead of the 50-day uncomplicated moving average (SMA) at 159.04.
Japanese Yen FAQs
The Japanese yen (JPY) is one of the most frequently traded currencies in the world. Its value is largely determined by, among other things, the performance of the Japanese economy, but in particular the policy of the Bank of Japan, the difference between the yields of Japanese and American bonds, and the risk sentiment of investors.
One of the tasks of the Bank of Japan is currency control, so its movements are crucial for the yen. The BOJ has at times intervened directly in currency markets, generally to depress the value of the yen, although it often refrains from doing so due to the political concerns of its major trading partners. The BOJ’s ultra-loose monetary policy in 2013–2024 resulted in the depreciation of the yen against other major currencies due to the growing policy divergence between the Bank of Japan and other major central banks. More recently, the gradual withdrawal from this ultra-loose policy has provided some support to the yen.
Over the past decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to widening policy divergences with other central banks, particularly the US Federal Reserve. This supported a widening spread between US and Japanese 10-year bonds, which supported the US dollar against the Japanese yen. The BoJ’s decision to gradually exit ultra-loose policy in 2024, combined with interest rate cuts at other major central banks, narrows the gap.
The Japanese yen is often viewed as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money into the Japanese currency due to its supposed reliability and stability. The turbulent times are likely to strengthen the value of the yen relative to other currencies considered riskier to invest in.
