What’s Next Amid U.S.-Japan Policy Divergence?
Written by: Rania Gule, Senior Market Analyst at XS.com
In recent weeks, the USD/JPY pair has experienced sharp fluctuations, and as of Friday, it is trading at 153.00. This movement is largely influenced by the U.S. Federal Reserve’s decisions and the presidential election results, in which Donald Trump emerged victorious. The election outcome has increased market risk appetite, boosting the dollar’s gains at the yen’s expense.
The Federal Reserve’s recent decision to cut interest rates by a quarter of a percentage point in November was in line with expectations. I believe the likelihood of continued rate cuts has contributed to the dollar’s relative stability, keeping it open to further gains. Economic pressures from inflation and slowing growth seem to have pushed the Fed toward greater flexibility in its monetary policy, which could attract more inflows into the dollar in the coming period, especially with rising expectations of another rate cut in December.
Trump’s victory has also significantly impacted the dollar’s performance against the yen, accompanied by an increase in U.S. Treasury yields, which has bolstered demand for the dollar. Anticipated pro-business policies from Trump, such as tax cuts and deregulation, have fostered optimism among investors, driving U.S. stock indices to record highs, with notable gains in the banking and technology sectors.
In my opinion, these moves may contribute to relative economic stability in the United States under Trump’s second term, reinforcing the dollar’s strength. Although the yen has fallen to a 14-week low against the dollar, inflationary pressures in Japan and weaker sentiment in its manufacturing sector could reduce the yen’s competitiveness against the strong dollar.
As for the Bank of Japan (BOJ), minutes from its latest meeting indicate that the central bank remains committed to its current easing policies, focusing on monitoring inflation and growth levels, despite board members acknowledging the impact of global economic conditions on the domestic economy. Although Governor Ueda has vowed not to rush into raising interest rates, the yen’s sharp decline may push the BOJ to adjust its policy sooner than expected if weakness persists. However, global economic uncertainty encourages the BOJ to exercise caution, reflecting the relative stability provided by strong U.S. monetary policy versus Japan’s more hesitant approach.
From my perspective, the current situation suggests a continued rise for the dollar against the yen in the short term, with the dollar benefiting from the strength of the U.S. economy and increasing investor confidence in upcoming economic policies. On the other hand, the BOJ’s cautious stance on rate adjustments weakens the yen’s competitiveness, further supporting the USD/JPY’s upward trend. Given current market indicators, the possibility of the dollar reaching new resistance levels seems increasingly realistic, especially as the Fed emphasizes its policy flexibility and market expectations grow for additional rate cuts.
