USD/JPY: Yen bounces back as BOJ, Fed policy paths diverge

Japanese currency rebounds from four-month low as central bank moves highlight contrasting monetary stances.

USD/JPY: Yen bounces back as BOJ, Fed policy paths diverge
Japanese Yen

The Japanese yen clawed back ground on Thursday, rebounding from a four-month low against the U.S. dollar.

The recovery came after the U.S. Federal Reserve maintained its monetary easing stance, contrasting sharply with the Bank of Japan's (BOJ) decision to end eight years of ultra-loose policy.

On Tuesday, the BOJ implemented its first interest rate hike since 2007, signalling a departure from its stimulus measures. However, BOJ Governor Kazuo Ueda stressed that policy would remain broadly accommodative for now, in comments to parliament.

Despite the BOJ's gradual tightening, the divergence with the Fed's dovish outlook fuelled the yen's rebound. Japanese government bond yields ticked higher amid expectations for further policy normalisation.

The Nikkei 225 index soared, marking a record closing high, up over 2% on the day. It also set a fresh all-time intraday peak of 40,823.32.

The dollar was last down 0.3% at 150.88 yen (USD/JPY), after touching 151.82 yen on Tuesday – its highest level since mid-November.

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While the Fed signalled the potential for three quarter-point rate cuts this year, Japanese policymakers emphasised that any further tightening would be very gradual. The Nikkei newspaper reported that the BOJ sees room for another hike in 2024, with market participants eyeing July or October as potential dates.

Analysts suggest the dollar yen could fall to 145 or lower if BOJ hikes coincide with Fed cuts in the medium term. However, carry trade demand could spur dip buying, potentially pushing the pair to 152 – a level that may trigger concerns over potential intervention.

On Thursday, Japanese Finance Minister Shunichi Suzuki warned the government was monitoring currency movements with "a high sense of urgency," though he made no comment on currency intervention.

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