USD/JPY strengthens above 156.50 as BoJ’s cautious tightening weighs on Japanese Yen

USD/JPY strengthens to around 156.75 in Friday’s early Asian session.
The cautious pace of BoJ’s monetary tightening weighs on the Japanese Yen and creates a tailwind for the pair.
The prospect of a US rate cut and concerns about the Fed’s independence might cap the upside for USD/JPY.

Lallalit Srijandorn FXStreet

The USD/JPY pair gains ground to near 156.75 during the early Asian session on Monday. The Japanese Yen (JPY) softens against the US Dollar (USD) as traders have been disappointed with the slow and cautious pace of the Bank of Japan’s (BoJ) monetary tightening.

The BoJ raised its policy rate to 0.75% from 0.50%, the highest level in 30 years, at its December policy meeting. However, the Japanese central bank did not provide specific guidance on the pace of future hikes, which disappointed the market and weighed on the JPY.

On the other hand, the US Federal Reserve (Fed) is expected to cut the interest rates further in 2026, and US President Donald Trump openly pushes for a more dovish central bank chief. This, in turn, might undermine the Greenback against the JPY.

Trump said that he expects the next Fed Chairman to keep interest rates low and never “disagree” with him. The comments are likely to heighten concerns among investors and policymakers about Federal Reserve independence.

“The biggest factor for the dollar in the first quarter will be the Fed,” said Yusuke Miyairi, a foreign-exchange strategist at Nomura. “And it’s not just the meetings in January and March, but who will be the Fed Chair after Jerome Powell ends his term,” Miyairi added.

The Fed cut rates three times in 2025, and traders anticipate two rate cuts this year. Financial markets are pricing in nearly an 18.3% chance the Fed will cut interest rates at its next meeting in January, according to the CME FedWatch tool.

(This story was corrected on January at 01:05 GMT to say, in the last paragraph, that the Fed cut rates three times in 2025, and traders anticipate two rate cuts this year, not next year)

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 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.

How does the differential between Japanese and US bond yields impact the Japanese 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.

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.

Author

Lallalit Srijandorn

FXStreet

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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