Yen Weakens Against Strong Dollar as Fed-BoJ Policy Gap Widens

In the third quarter of 2023, the Japanese yen faced significant pressure against the U.S. dollar due to contrasting monetary policies adopted by the Federal Reserve and the Bank of Japan.

The Federal Reserve has taken a proactive stance in combating inflation by raising interest rates. This aggressive approach has seen its benchmark rate reach its highest point since 2002. Furthermore, U.S. Treasury yields have surged to multi-year highs.

In stark contrast, the Bank of Japan has maintained its ultra-easy monetary policy. Fearing potential disruptions to its efforts to combat deflation, the BoJ has refrained from tightening its policies. Even though the Consumer Price Index (CPI) has consistently exceeded its 2.0% target for over a year, the BoJ remains committed to its negative interest rate policy.

As a result of these divergent policies, the USD/JPY pair soared near the critical 150.00 level in late September. This marked its highest point in nearly a year, underscoring the dominance of the U.S. dollar in the market.

Outlook for the Yen in Q4

Looking ahead to the fourth quarter, analysts believe that the yen may continue to weaken initially. The Fed is poised to hike rates once more and signal a commitment to maintaining higher rates. However, the yen might gain support later in the quarter as the Bank of Japan hints at a potential policy shift by year-end.

According to DailyFX, BoJ Governor Kazuo Ueda has suggested a willingness to consider raising interest rates if stable inflation is confirmed by consumer price data.

This hints at a potentially volatile period for the yen as the market eagerly anticipates and reacts to policy developments from both central banks. Depending on the evolution of the Fed-BoJ policy gap in the coming months, the USD/JPY pair could see new highs or lows.