Why is the Japanese Yen weakening as the Fed’s hold exposes a hawkish split?

USD/JPY advances to 158.28, up 0.21%, after the Fed's rate announcement.
Two officials favour tighter policy as the Fed leaves rates unchanged at 3.75%-4%.
Rate hikes remain a possibility as inflation persists and US economic activity stays resilient.

The Japanese Yen weakened against the US Dollar following the Federal Reserve's decision to leave interest rates unchanged, with USD/JPY trading 0.21% higher at 158.28. The Fed maintained its stance despite US inflation remaining well above its 2% target. However, two officials dissented, preferring a quarter-percentage-point rate increase.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Can USD/JPY Reach 158.50 as two Fed officials favour a rate hike amid persistent inflation?

Interest rates were left at 3.75%-4% by the Fed on Wednesday. The central bank acknowledged expanding economic activity and said domestic spending “has been resilient, that productivity growth is strong and that capital investment is robust,” while also highlighting strong productivity growth. Turning to its employment mandate, the Fed observed: “Job gains have kept pace with the workforce, and the unemployment rate has changed little.”

Although inflation remains elevated, the central bank opted against raising rates as it collects further information and evaluates the appropriate policy stance.

Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack cast the two dissenting votes on the FOMC.

USD/JPY Daily Price Chart

Japanese Yen: Frequently Asked Questions

Which factors influence the Japanese Yen most?

Among the world's most actively traded currencies, the Japanese Yen (JPY) draws its value broadly from Japan's economic performance. More specific influences include the Bank of Japan's policy stance, the gap between Japanese and US bond yields, and traders' appetite for risk, alongside other factors.

Why do Bank of Japan decisions matter for the Japanese Yen?

Currency control forms part of the Bank of Japan's mandate, making its actions important for the Yen. At times, the BoJ has intervened directly in currency markets, usually to weaken the currency. Such interventions remain infrequent, however, because of political concerns among Japan's main trading partners. Between 2013 and 2024, the BoJ's ultra-loose monetary policy widened the divergence between its stance and those of other major central banks, weakening the Yen against its leading currency peers. The gradual withdrawal of that exceptionally accommodative policy has more recently provided the Yen with some support.

Why does the Japanese-US bond yield gap matter for the Japanese Yen?

A widening gap between 10-year US and Japanese bond yields has favoured the US Dollar over the Japanese Yen. Over the past decade, that gap was supported by growing policy divergence as the BoJ maintained ultra-loose monetary settings while other central banks, particularly the US Federal Reserve, took a different approach. The differential is now narrowing following the BoJ's 2024 decision to gradually move away from ultra-loose policy and interest-rate reductions by other major central banks.

Why does the Japanese Yen respond to shifts in risk sentiment?

During periods of market stress, investors are more inclined to move money into the Japanese Yen, which is widely regarded as a safe-haven investment because of its perceived reliability and stability. As a result, market turbulence is likely to lift the Yen against currencies considered riskier investments.