• The Japanese Yen weakens against the US Dollar on Monday amid still–elevated US interest-rate projections. 
• The Fed’s reluctance to entertain interest-rate cuts until more data assures them inflation is coming down, is a factor. 
• The BoJ’s expected bond-taper supports JPY but weak wage data and imported inflation weigh. 

The Japanese Yen (JPY) trades lower by about a third of a percent against the US Dollar (USD), in the 157.80s on Monday, as the outlook for interest rates in the US remains elevated despite lower inflation and economic sentiment readings. The expectation of higher interest rates supports the USD by attracting greater inflows of foreign capital. 

The Japanese Yen, meanwhile, weakens as despite moderate gains to inflation, Japanese real wages – which are adjusted for inflation – continue to fall, registering the 25th consecutive month of declines in April, data from the Ministry of Health, Labor and Welfare shows. The data suggests much of Japan’s inflation is imported because of a historically weak Yen rather than due to increased consumer spending. 

The Yen does however receive a modicum of support from Friday’s Bank of Japan (BoJ) meeting. Although the BoJ did not raise interest rates which languish in a range between 0.0% - 0.1% – the lowest of any developed central bank – it did say it was planning to reduce quantitative easing (QE). Officials announced that at the next meeting in July they would be revealing plans on tapering Japanese Government Bond (JGB) purchases. A reduction in QE is positive for the Japanese Yen as it helps raise interest rates.  

USD/JPY remains supported by comments from the Chairman of the Federal Reserve (Fed), Jerome Powell. At the Fed’s June policy meeting Powell said he needed more assurances that inflation was coming down in a sustainable fashion before cutting interest rates. 

Future interest rate forecasts from members of the Federal Open Market Committee (FOMC), who are tasked with setting interest rates, were also revised, documents accompanying the June meeting showed. From members forecasting three 0.25% cuts to the Fed Funds Rate in 2024, in March, the June projections showed only one 0.25% cut now penciled in amid stickier-than-expected inflation. The expectation that US interest rates will remain higher for longer was a boost for the US Dollar.

US Consumer Price Index (CPI) data for May, released a few hours before the Fed meeting, showed a lower-than-expected reading suggesting price pressures were dissipating. Chairman Powell, however, dismissed the data as insufficient to force the Fed to lower interest rates from their 5.25% - 5.50% band. More data showing lower inflation would be required, he said, before the Fed could be confident the long-run inflation rate was on its way down.

US Producer Price Index (PPI) data on Thursday showed “factory gate” prices slowly cooling in May, further adding to the picture of a declining US inflationary backdrop. 

On Friday the Michigan Consumer Sentiment Index declined for the third straight month in a row to 65.6 in June, from 69.1 in May and well below forecasts of 72, preliminary estimates showed. Year-ahead inflation expectations, however, remained unchanged at 3.3%, but the five-year one edged up to 3.1% from 3.0% in May, data from the University of Michigan showed. 

USD/JPY traders will also be wary of the risk of Japanese government direct intervention in the Forex markets after myriad warnings from high-ranking officials and currency czars. Data from the BoJ also revealed it had intervened to make market operations to prop up the Yen when USD/JPY experienced sudden corrections in late April and early May recent records showed.