Japanese Yen Strengthens Amid Fed Criticism and Trade Uncertainty

Japanese Yen gained ground on Monday as the US Dollar weakened, driven by fresh political tensions and rising concerns over central bank independence. The Yen’s upward move followed a weekend election in Japan, where the ruling coalition lost its majority in the upper house, stirring uncertainty over the government’s future economic direction.

Despite the Yen’s climb, markets remain cautious. Political instability in Japan may hinder effective collaboration with the Bank of Japan (BoJ) and complicate upcoming fiscal policies. While the Japanese Yen initially benefited from risk-off sentiment, any extended rally could be capped by hesitation around potential policy paralysis in Tokyo.

Meanwhile, the USD/JPY pair dipped, trading around 147.30 during U.S. market hours. The US Dollar Index (DXY) also came under pressure, sliding below 98.00—a daily decline of nearly 0.75%. This drop reflects growing discomfort among investors as political rhetoric in Washington ramps up.

Fed Criticism Fuels Market Caution

Treasury Secretary Scott Bessent made headlines Monday after publicly questioning the Federal Reserve’s effectiveness during a CNBC interview. Calling for a “full review” of the institution, Bessent’s remarks fueled speculation that the Fed’s independence could come under threat. This added to the broader uncertainty weighing on the US Dollar, allowing the Japanese Yen to gain momentum.

Bessent challenged the central bank’s inflation outlook and dismissed concerns over tariff-related price increases. He asserted that inflation is largely under control and advocated for lower interest rates to support housing and broader economic growth. His comments further intensified the policy divide between the US administration and the Federal Reserve, creating additional volatility in the currency markets.

Key Data Could Sway Japanese Yen Outlook

Traders are now eyeing several key economic indicators that could determine the short-term direction of the Japanese Yen. Japan is set to release the Jibun Bank Flash Manufacturing PMI on Thursday, which will shed light on domestic industrial activity. That same day, the US will publish its S&P Global PMI figures for July—offering insight into the performance of both the manufacturing and service sectors.

Friday’s Tokyo Consumer Price Index (CPI) will be particularly important for the Bank of Japan. A stronger-than-expected inflation print could raise the likelihood of further monetary tightening, potentially supporting the Japanese Yen further.

With both economies releasing critical data, the USD/JPY pair may experience increased volatility, depending on how markets interpret signs of inflation and growth momentum.

In total, the Japanese Yen remains a currency to watch closely as global uncertainty deepens and economic policy paths diverge on both sides of the Pacific.

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