The Japanese Yen gives back recent gains amid uncertainty surrounding the BoJ’s policy outlook

The Japanese Yen (JPY) depreciates against the US Dollar (USD) on Tuesday amid growing concerns that the Bank of Japan (BoJ) is not expediting interest rate hikes. Following the BoJ's policy decision on Friday, Governor Kazuo Ueda acknowledged that while Japan's economy is showing signs of moderate recovery, there are still indications of underlying weakness.

On Tuesday, Japan’s Finance Minister Shunichi Suzuki emphasized that he is "monitoring the impacts of central banks' monetary policies." He expressed confidence that the Bank of Japan will adopt appropriate monetary policy measures while closely coordinating with the government.

The USD/JPY pair could weaken further as expectations rise for additional rate cuts by the US Federal Reserve (Fed) in 2024. The CME FedWatch Tool indicates that markets are pricing in a 50% probability of a 75 basis point reduction, which would bring the Fed's rate to a range of 4.0-4.25% by year-end.

Daily Digest Market Movers: Japanese Yen Remains Subdued Amid Dovish BoJ

• The Jibun Bank Japan Composite Purchasing Managers Index (PMI) fell to 52.5 in September, down from a final reading of 52.9 in August, which was the highest in 15 months. Despite this decline, it marks the eighth consecutive month of growth in private sector activity this year, largely driven by the service sector. The Services PMI rose to 53.9 in September, up from 53.7 in the previous month.
• In the U.S., the S&P Global Composite PMI expanded at a slower pace in September, registering 54.4 compared to 54.6 in August. The Manufacturing PMI unexpectedly dropped to 47.0, indicating contraction, while the Services PMI exceeded expectations, reaching 55.4.
• Minneapolis Fed President Neel Kashkari indicated on Monday that he anticipates further interest rate cuts in 2024, although he expects these cuts to be smaller than the September reduction, according to Reuters. Chicago Fed President Austan Goolsbee stated, “Many more rate cuts are likely needed over the next year, and rates need to come down significantly.” Additionally, Atlanta Fed President Raphael Bostic remarked that the U.S. economy is nearing normal levels of inflation and unemployment, emphasizing the need for the central bank to "normalize" monetary policy.
• On Monday, Japan's new "top currency diplomat," Atsushi Mimura, stated in an interview with NHK that the Yen carry trades accumulated in the past have likely been largely unwound. Mimura warned that an increase in such trades could lead to heightened market volatility, adding, "We are always monitoring the markets to ensure that does not happen."
• Japan's Consumer Price Index (CPI) rose to 3.0% year-on-year in August, up from 2.8% previously, marking the highest level since October 2023. The Core National CPI, excluding fresh food, reached a six-month high of 2.8%, increasing for the fourth consecutive month and aligning with market expectations.
• Federal Reserve Chair Jerome Powell commented on the aggressive 50 basis point rate cut, stating, “This decision reflects our increased confidence that, with the right adjustments to our policy approach, we can maintain a strong labor market, achieve moderate economic growth, and bring inflation down to a sustainable 2% level.”