USD/JPY Fundamental Daily Forecast – Traders Bracing for Rate Hike Slowdown, but Hawkish Fed Could Sink Yen

The Dollar/Yen is edging lower on Wednesday as traders await the Fed’s interest rate decision and policy statement, due to be released at 18:00 GMT.

The Federal Reserve is widely expected to raise its benchmark interest rate by 75-basis points, but the market moving event will be what policymakers have to say about a December rate hike.

At 03:54 GMT, the USD/JPY is trading 147.464, down 0.772 or -0.52%. On Tuesday, the Invesco CurrencyShares Japanese Yen Trust settled at $63.00, up $0.19 or +0.30%.

In other news, the Bank of Japan’s Monetary Base fell 6.9%, worse than the 2.0% forecast. The Bank of Japan (BOJ) also released its monetary policy meeting minutes.

BOJ’s Kuroda Flags Tweak to Ultra-low Interest Rates as Future Option

Bank of Japan Governor Haruhiko Kuroda said on Wednesday a tweak to the central bank’s yield curve control (YCC) policy could become a future option, but dismissed it for now.

“If the achievement of our 2% inflation target comes into sight, making yield curve control more flexible could become an option,” Kuroda told parliament.

The remark will likely keep alive market expectations of a tweak to the central bank’s ultra-low interest rates when the dovish Kuroda’s second, five-year term ends in April next year, according to Reuters.

BOJ Minutes Show Japan’s Economy Continues to Recover

According to minutes from the Bank of Japan’s September 21-22 monetary policy meeting, members of the BOJ’s Monetary Policy Board feel that the country is continuing to recover from the economic downturn caused by the COVID-19 pandemic.

The minutes showed that financial conditions in Japan have been generally accommodative with exports and industrial production also picking up steam. Nonetheless, members also agreed that risks remain for the Japanese economy – not the least of which is the persistence of COVID-19.

Daily Forecast

The BOJ remains an outlier among the hawkish major central banks as it focuses on reflating a fragile economy with aggressive stimulus. Kuroda has repeatedly stressed the bank’s resolve to keep monetary policy ultra-loose.

The Yen has weakened sharply against the dollar as markets focus on the divergence between the BOJ’s ultra-loose policy and U.S. interest rate hikes.

Wednesday’s Fed rate hike will keep the divergence intact as well as the long-term trend of the USD/JPY. However, we could see short-term weakness in the Forex pair if Fed policymakers led by Chairman Jerome Powell announce the central bank is considering slowing down the pace of its aggressive rate hikes to 50-basis points starting in December.