Japanese Yen Strengthens to Multi-Week High Amid Bearish USD and Diverging BoJ-Fed Policies

Japanese Yen Continues to Maintain Firm Gains Near Multi-Week High Against a Bearish USD

The Japanese Yen (JPY) has strengthened for the third consecutive day, reaching a multi-week high against the US Dollar (USD) during the Thursday Asian session. This continued rally reflects a mix of dovish Bank of Japan (BoJ) policies and growing expectations of a Federal Reserve (Fed) rate cut.

Divergence Between BoJ and Fed Policy Outlooks

The BoJ has maintained its cautious stance while revising its inflation forecast for July. Although the BoJ avoided closing the door on a potential interest rate hike by the end of the year, it remains largely dovish compared to the growing expectations that the Fed will resume its rate-cut cycle starting in September. This divergence between BoJ and Fed policies has contributed to the ongoing weakness of the USD, pushing the JPY higher.

The USD continues to lose ground as Fed rate cuts are priced into markets, and this has prompted flows into the lower-yielding JPY, which benefits from the comparative weakness of the US Dollar.

Impact of Japan’s Economic Sentiment on JPY

Despite the JPY’s strength, Japan's economy still faces some challenges. For the sixth consecutive month, real wages in Japan dropped in June, raising concerns about consumption-driven growth. Moreover, the negative impact of higher US tariffs on Japan’s economy continues to weigh on sentiment.

This, coupled with domestic political instability, has led to expectations that further BoJ rate increases may be delayed, potentially tempering the JPY's bullish momentum. However, global risk-on sentiment continues to provide support to the Yen, which remains a safe-haven currency amid economic uncertainty.

Outlook for the Japanese Yen

Although JPY’s bullish momentum is showing signs of cooling, the fundamental backdrop still appears favorable for the Yen. The divergence in monetary policy between the Fed and BoJ remains a key driver for the Yen’s strength. JPY bulls are likely to continue dominating the market in the short term, with any potential pullbacks likely to be seen as buying opportunities.

As long as global equities maintain their positive trend, further strengthening of the safe-haven JPY may be capped. However, if concerns about US economic performance or global trade continue to rise, the JPY could remain well-supported against the USD.