Japanese Yen weakens with Fed and BoJ monetary policy meetings in focus

• USD/JPY trades with a positive bias as the Japanese Yen struggles across the board.
• The Fed and BoJ are widely expected to leave interest rates unchanged at this week's meetings.
• Markets anticipate further tightening in December, keeping policymakers' guidance in focus.

USD/JPY trades with a positive bias on Monday as the Japanese Yen (JPY) underperforms its major peers, while a firmer US Dollar (USD) adds support to the pair. At the time of writing, USD/JPY trades around 157.42 after slipping to 156.08 on Friday, its lowest level since September 18.

The US Dollar finds some footing after ending last week in negative territory, as concerns over AI-related investments drove demand for government bonds and pushed US Treasury yields lower. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.91 after falling to 101.45 last week, its lowest level since October 1.

Yields are mixed on Monday, with shorter-dated yields edging higher while longer-dated yields remain little changed near recent lows. The benchmark 10-year US Treasury yield stands around 4.98%.

All eyes on Fed and BoJ monetary policy announcement

The Federal Reserve (Fed) announces its interest rate decision on Wednesday, followed by the Bank of Japan (BoJ) on Friday. Both central banks are widely expected to hold rates steady after the Fed raised rates by 25 basis points (bps) in September and the BoJ delivered a cumulative 50 bps of tightening earlier this year, as the Middle East energy shock added to inflationary pressures.

However, traders anticipate further hikes from both in December. With pauses largely expected, attention will centre on the policy statements and remarks from Fed Chair Kevin Warsh and BoJ Governor Kazuo Ueda for clues about the timing and pace of further tightening.

Recent inflation data from both the United States and Japan support expectations of further tightening. US headline CPI accelerated to 3.7% YoY in September from 3.4%, while the Producer Price Index (PPI) rose 6.3% YoY, up from 5.6% in August. In Japan, inflation excluding fresh food rose to 2.1% from 1.7%, moving above the BoJ’s 2% target, while the measure excluding fresh food and energy increased to 2.4% from 1.9%.

BoJ pause keeps focus on December as firmer inflation supports Yen

Strategists at Brown Brothers Harriman note that the BoJ is “widely expected to keep rates on hold at 1.25% and assess September’s 25bps hike before tightening again.” They recall that in September, BoJ Governor Kazuo Ueda “warned that rapid rate hikes could unsettle asset prices,” while also cautioning that “it could take some time to confirm that 2% inflation is entrenched.”

Even so, BBH argues that “firmer underlying inflation leaves scope for a more hawkish Outlook Report, lifting BoJ rate expectations in favor of JPY.” Reflecting this shift, they highlight 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.”