USD/JPY consolidates above 156.00 in countdown to BoJ/Fed policy interest rate policies

• USD/JPY trades in a tight range above 156.00 with a focus on BoJ/Fed policy meetings.

• The BoJ is expected to raise interest rates by 10 bps and reveal bond-tapering plans.

• Investors see the Fed maintaining a status quo.

The USD/JPY pair trades back and forth in a tight range above the crucial support of 156.00 on Monday’s European session. The asset shifts to the sidelines with investors focusing on the interest rate announcements by the Bank of Japan (BoJ) and the Federal Reserve (Fed), which are scheduled for Wednesday.

The Japanese Yen (JPY) steadies after appreciating for straight three weeks against the US Dollar (USD) as its safe-haven appeal was upbeat amid political uncertainties in various economies and China’s economic woes.

Going forward, investors will focus on the BoJ meeting in which policymakers are expected to vote for hiking interest rates by 10 basis points (bps) in an attempt to pivot towards policy normalization. The BoJ will also unveil plans to taper bond-buying operations, which will add to an improvement in Yen’s appeal.

Meanwhile, slight recovery in the US Dollar has brought a temporary halt in major’s upside. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, moves higher to near 104.50.

The US Dollar rises as investors turn cautious ahead of the Fed’s monetary policy meeting in which officials are expected to leave interest rates unchanged in the range of 5.25%-5.50%. Investors will keenly focus on the interest rate guidance, which is expected to remain dovish. The Fed is expected to acknowledge progress in disinflation and highlight upside risks to labor market conditions.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.