Rumours drag USD/JPY lower

USD/JPY has fallen to 155.00 due to a combination of risk-off market sentiment and rumors that the Bank of Japan (BoJ) is considering reducing bond purchases at its June meeting. This move would raise Japanese bond yields and support the Yen, a negative for USD/JPY. The US Dollar (USD) bounced after the steep sell-off of the previous day when the US ISM Manufacturing PMI came out lower than expected in May.

The fall in US manufacturing activity was mainly caused by a decline in the New Orders and Prices Paid components, indicating possible hamstrung future growth and lower inflation expectations. This, in turn, increased bets the Federal Reserve might lower interest rates, with the probabilities of a rate cut in September rising to around 65%.

USD/JPY declines over half a percent on Tuesday partly as a result of market rumors first reported by Bloomberg News, that the BoJ is considering reducing the number of bond purchases it makes via its quantitative easing (QE) program. If implemented, the policy move will reduce demand for Japanese Government Bonds (JGB), raising yields (which move inversely to bond prices) and positively impacting the Yen, which is highly correlated to bond yields.

Policymakers will reportedly discuss the appropriate timing to slow its bond buying from around JPY6 trillion ($38.4 billion) per month currently, and whether the BOJ needs to provide more details to improve predictability.

USD/JPY was further hit by intervention fears. The Deputy Governor of the BoJ, Ryozo Himino, repeated concerns regarding how a weak JPY might be negatively impacting the economy, suggesting the BoJ might be gearing up for another direct intervention in FX markets to prop up JPY (negative for USD/JPY).

He also discussed the impact the weak Yen was having on inflation, which the BoJ would prefer to derive from higher wages, as this would lead to more spending, higher consumption, and a more dynamic economy.

US jobs data will be the focus for the pair this week, with just-released JOLTS Job Openings showing a deterioration in the job market.