• USD/JPY extends its downtrend as markets diggest Fed Chairman Powell’s speech and its implications. 
• Expectations are for major cuts to US interest rates over the next year and a half as the US economy contracts. 
• The Japanese Yen benefits from the further unwinding of the carry trade. 

USD/JPY falls to the 144.10s on Monday, continuing its recent downtrend from the August 15 highs of 149.40. This means one US Dollar (USD) buys five less Japanese Yen (JPY) than it did 11 days ago. 

USD’s recent depreciation is due to increasing expectations that US interest rates are set to fall. The expectation of lower interest rates is negative for the Dollar because it lowers foreign capital inflows.

On Friday, at a speech given in Jackson Hole where global central bankers met for their yearly roundtable, the Chairman of the Federal Reserve (Fed) Jerome Powell gave his clearest signal yet that the Fed was about to cut interest rates. High interest rates were negative for employment, he said, and since inflation was now coming down in a more sustainable fashion the time was right to start cutting. “Upside risks to inflation have diminished, downside risks to employment have increased,” said Powell. USD/JPY fell over 1.3% as a result. 

In Japan deflation rather than inflation has been a problem, leading the Bank of Japan (BoJ) to keep interest rates ultra low – now 0.25% – and the Yen historically weak. 

Despite efforts by the government to encourage higher wages, inflation remains stubbornly low. Recent inflation data showed headline inflation at 2.8% in July YoY, the same level as June, and inflation ex fresh food at 2.7% – up from 2.6% in the previous month, a rise which was in line with forecasts. Inflation with both fresh food and energy taken out meanwhile fell to 1.9% from 2.2% in the previous month, which is below the BoJ’s 2.0% target for core inflation.