Japanese Yen gains ground ahead of BoJ minutes, USD under pressure amid policy uncertainty

The Japanese Yen (JPY) extended its gains against the US Dollar (USD) on Monday, strengthening slightly after staging a sharp rebound from a four-month low of 150.84 following Friday’s disappointing US employment report. The softer labor market print has fueled expectations of monetary policy easing by the Federal Reserve (Fed) at its next meeting in September, which is weighing on the Greenback and boosting demand for the safe-haven Yen.

At the time of writing, the USD/JPY pair is hovering near 147.00 during American trading hours, having given up recent gains that were fueled by a strong US Dollar rally earlier in the week. Meanwhile, the US Dollar Index (DXY), which tracks the value of the Greenback against a basket of six major currencies, is showing signs of stabilization, currently trading around 98.80 after pulling back from a two-month high of 100.26.

The pause in US Dollar momentum reflects growing uncertainty over the Fed’s next move, as traders reassess the likelihood of a rate cut as early as September. This shift stands in contrast to the Fed’s hawkish stance at its latest meeting, where officials stressed a data-dependent approach and flagged persistent inflation risks, especially from tariffs and supply-side pressures. Fed Chair Jerome Powell offered no clear forward guidance, saying no decision had been made for September and underscoring the need for more evidence of cooling inflation. Still, with labor market weakness surfacing and internal dissent growing, two Fed governors voted for immediate easing — market participants are increasingly leaning toward a dovish pivot.

According to the CME FedWatch Tool, markets are now pricing in an 87.8% probability of a 25 basis point rate cut at the Fed’s September meeting. This sharp repricing reflects growing conviction that the central bank will be forced to pivot sooner rather than later in response to deteriorating labor market conditions.

Adding to the uncertainty, the recent resignation of Fed Governor Adriana Kugler and US President Donald Trump's announcement that he plans to nominate a replacement this week have introduced fresh political overtones into the Fed's outlook. These developments are raising concerns over the central bank’s independence and could further influence market expectations ahead of the September policy meeting.

On the Japan side, the Bank of Japan’s (BoJ) Monetary Policy Meeting Minutes are scheduled for release on Tuesday and will be closely scrutinized for insights into the central bank’s internal policy discussions. In a press conference last week, BoJ Governor Kazuo Ueda explained that the central bank had unanimously decided to keep the short‑term interest rate steady, while raising its core consumer inflation forecast for the current fiscal year to 2.7%, up from 2.2% previously. Governor Ueda emphasized that any future interest rate hikes would be data-dependent, and the BoJ would not necessarily wait until underlying inflation reaches the 2% target before acting. Instead, the central bank would respond once it becomes "highly likely" that inflation will sustainably hit that level, especially if accompanied by stronger wage growth. While acknowledging that the inflation trend is improving, Ueda noted that much of the price pressure remains supply-driven, particularly due to elevated food costs. He warned that premature tightening could suppress domestic consumption, which remains fragile.

Markets will be watching for any hawkish tilt in the minutes, especially regarding the timing of the next rate hike, which some analysts expect could come as early as October. Any indication that policymakers are growing more confident in Japan’s inflation and wage growth outlook could strengthen the case for policy normalization and offer additional tailwinds to the Japanese Yen.