Japanese Yen consolidates as traders weigh weak US data, market sentiment

USD/JPY trades around 157.65 on Wednesday at the time of writing, little changed on the day, as weakness in the US Dollar (USD) is offset by investors' cautious stance toward the Japanese Yen (JPY).

The US Dollar remains under pressure after a series of weaker-than-expected US economic releases. The Automatic Data Processing (ADP) report showed that the US private sector added 44K jobs in July, below the market consensus of 70K and following a gain of 98K in June. Meanwhile, the Institute for Supply Management (ISM) reported that its Services Purchasing Managers Index (PMI) came in at 54.1 in July, slightly below expectations of 54.5. Although the services sector continues to signal expansion, the Employment Index fell to 47.4 from 51.2 previously, highlighting softer hiring conditions.

The Greenback is also weighed down by reports that the US Treasury Department has lifted selected Iran-related sanctions, removing restrictions on two aircraft and three airlines. The move is viewed as a sign of progress in negotiations between the United States (US) and Iran. Separate reports also suggest that a draft agreement between Oman and Iran has been finalized and is now awaiting approval from Tehran, improving overall market sentiment.

On the Japanese side, investors continue to assess the Minutes of the Bank of Japan (BoJ) June policy meeting. Although the document predates the latest monetary policy developments, it shows that policymakers were already debating the need for further rate hikes in response to inflation risks. BoJ Governor Kazuo Ueda has also repeatedly stated that the central bank is prepared to continue normalizing monetary policy if economic conditions allow, providing underlying support for the Japanese Yen.

At the same time, a Reuters poll showed that the vast majority of foreign exchange strategists believe that further intervention by the Japanese authorities alone would not be enough to sustainably support the JPY. This reinforces the view that the currency's longer-term direction will depend primarily on the Bank of Japan's monetary policy outlook and the interest rate differential with the United States.

Japanese Yen support builds as BoJ hike odds rise and US intervention reinforces USD/JPY ceiling

Strategists at Brown Brothers Harriman note that “USD/JPY is holding just under its 200-day moving average (158.04)” as stronger wage data in Japan bolster expectations for further BoJ tightening. They point out that “faster Japan wage growth lifted BoJ rate hike bets,” with June total nominal wage growth matching consensus at “3.4% y/y vs. 3.2% in May,” while the less volatile scheduled pay for full-time workers “quickened more than expected to a four-month high at 2.9% y/y (consensus: 2.7%) vs. 2.5% in May.”

In rates pricing, BBH highlights that “implied odds of a 25 bps BoJ rate hike to 1.25% at the next September 18 meeting rose to 60% from a low of nearly 40% ahead of the wage data.” They acknowledge that “underlying inflation in Japan remains subdued,” but argue that “risks are skewed towards further hawkish BoJ repricing in favor of JPY,” noting that “the policy rate is near the lower end of the bank’s neutral range (1.10%-2.50%) while the economy is operating above potential.”

On the policy front, BBH also flags the signal from recent official action. They report that “yesterday, US Treasury Secretary Scott Bessent implicitly confirmed that as part of Friday’s joint intervention with Japan, the US bought yen for euros, rather than buying yen and selling dollars.” According to BBH, Bessent “said he assured Europeans the intervention was just a reallocation of the US reserves, adding it ‘seems to me the euro is much closer to an equilibrium price’.”

While BBH concedes that “these FX holdings are too small to be a game changer for the yen given daily JPY turnover of $1.61 trillion,” they stress that “the policy signal is powerful.” In their view, this stance “significantly raises the cost of fighting a stronger yen and puts a much firmer ceiling on USD/JPY.”