Differences in Japanese and U.S. monetary policy and warnings from the countries’ financial authorities are affecting the USD/JPY market. The U.S. continues to signal the possibility of additional rate hikes, while expectations for further Bank of Japan rate hikes are also being priced in. Warnings from both countries that the yen is undervalued are moving the market.
In September, the U.S. raised its policy rate to 3.75%–4.00%, while Japan raised its policy rate to 1.25%. The U.S. PCE price index rose 3.4% year on year, above the Federal Reserve’s target, and although the labor market is also showing signs of slowing, the possibility of additional rate hikes remains. In Japan, expectations for further Bank of Japan rate hikes are being priced in, and the interest-rate differential remains above 2 percentage points.
The Japanese and U.S. financial authorities reaffirmed their view that “the yen’s undervaluation is a problem.” During a phone call between Finance Minister Katayama (片山) and U.S. Treasury Secretary Scott Bessent, remarks indicated the significance of coordinated intervention, marking a period in which both Japan and the U.S. strengthened their efforts to counter yen depreciation. Attention was also drawn to the fact that the finance minister himself disclosed to the market the exchange during the Japan-U.S. leaders’ meeting on 22 September.
In fact, when this information was reported, USD/JPY briefly plunged to the ¥156 range. Views have emerged that USD/JPY could move substantially depending on the combination of a slowdown in the pace of Federal Reserve rate hikes, the possibility of further Bank of Japan rate hikes, and statements by Japanese and U.S. authorities aimed at countering yen depreciation.
The focus going forward is not limited to the interest-rate differential. It also includes the direction of policy developments, U.S. economic indicators, and the currency policies of the Japanese and U.S. financial authorities. Position management may become important around the ¥160 level.