USD/JPY soaring on BoJ’s stance, climbing T-yields

The American dollar is gaining ground against the Yen. As the Bank of Japan maintains rates and sticks with its accommodative monetary policy while raising concerns about the durability of increasing inflation, the USD/JPY pair is showing a gain of 0.38%. The US dollar is supported by rising US Treasury bond yields, which have reached levels not seen since 2007. As a result, it has risen above the 106.00 mark.

As budget negotiations drag and lawmakers use the budget as a political tool, a potential US government shutdown looms. This might strengthen the Japanese Yen and have a negative impact on USD/JPY.

Following the Bank of Japan’s (BoJ) announcement last week that interest rates would remain steady while issuing a dovish statement, the dollar increases significantly against the Japanese Yen. This is a tailwind for the market together with a risk-off trend and rising US bond yields.

The BoJ maintained rates in the negative range last Friday and vowed to continue its ultra-loose monetary policy despite the most recent inflation readings, which indicate inflation is higher than the bank’s target of 2%. However, BoJ officials are unsure if it may last for a longer time.

Governor of the Bank of Japan, Kazuo Ueda, stated that businesses face “very high uncertainty” on their ability to raise prices and wages as the bank maintains its supportive stance. According to Ueda, the BoJ is not “fully convinced” that wages would continue to grow, which is used as justification for the BoJ to maintain its stance. Although the Japanese Prime Minister stated that excessive FX moves are undesirable and that authorities would continue, threats of involvement have continued.

The financial markets are impacted by the mantra of greater prices for longer. US Treasury bond yields are rising while Wall Street is falling, as the US Fed is expected to raise interest rates one more this year. For the first time since November of last year, the US 10-year Treasury bond yield reached a high of 4.533%, which was previously seen in 2007. This level supports the greenback over the 106.00 mark.

As Fed officials, particularly Governor Michelle Bowman, emphasised the necessity for additional rate increases, the USD/JPY has continued to move upward. The presidents of the Boston and San Francisco Feds, Susan Collins and Mary Daly, on the other hand, stressed the need for patience but didn’t exclude out another rate increase. Austan Goolsbee, President of the Chicago Fed, recently stated that a soft landing is feasible.

Another factor contributing to the change in market attitude is the US Congress’s warning that a shutdown is imminent as a result of the impasse in budget negotiations. Once more, US politicians exploit the budget as a tool to further their political agenda. Typically, legislators don’t resolve this until the last minute, so traders need to be aware of this. In the case of a shutdown, watch for the Japanese Yen (JPY) to strengthen, which might lead to a decline in the USD/JPY.