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USD/JPY slumps to near 156.00 after Fed cuts rates

  • USD/JPY falls to around 156.00 in Thursday’s early Asian session.
  • The Fed cut interest rates in December but signaled a pause at the next policy meeting.
  • Fiscal concerns in Japan could weigh on the Japanese Yen and cap the pair’s downside.

The USD/JPY pair tumbles to near 156.00 during the early Asian session on Thursday. The US Dollar (USD) weakens against the Japanese Yen (JPY) after the Federal Reserve (Fed) lowered interest rates in a widely expected move. The US weekly Initial Jobless Claims data are due later on Thursday.

The Federal Open Market Committee (FOMC) voted 9-3 on Wednesday to lower the benchmark federal funds rate by 25 basis points (bps) to a range of 3.5%-3.75%. The Greenback edges lower against its rivals immediately after the Fed's announcement. Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid argued that the policy rate should be held steady, while Fed Governor Stephen Miran again advocated for a jumbo reduction.

Fed Chair Jerome Powell said that the reduction puts the central bank in a comfortable position as far as rates go. “We are well positioned to wait and see how the economy evolves,” said Powell. The CME FedWatch tool showed fed funds futures are pricing in a more than 77% probability that the US central bank would slash rates two more times next year.

On the other hand, Japan’s Prime Minister Sanae Takaichi has a pro-growth agenda, which is seen by markets as a signal for potential fiscal stimulus and looser financial conditions. Concerns about expansionary fiscal measures in Japan and growth worries could exert some selling pressure on the JPY and act as a tailwind for the pair.

Japanese Yen FAQs

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.

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 BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

Over the last decade, 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 supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

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.

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Lallalit Srijandorn

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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