USD/JPY Faces Political Turmoil and Fed Crosswinds
USD/JPY is holding near 147.50 after a volatile week dominated by political instability in Japan and shifting expectations for U.S. monetary policy. Prime Minister Shigeru Ishiba’s resignation has left a power vacuum in Tokyo, injecting fresh uncertainty into how aggressively the Bank of Japan can pursue policy normalization. Investors are wary that his successor could lean toward keeping rates lower for longer, a stance that undermines the yen. At the same time, U.S. Treasury and Japan’s Finance Ministry issued a joint statement—the first since 2022—that reaffirmed that FX should be market-driven, a signal to traders that direct intervention is unlikely unless volatility spikes. This policy backdrop has helped anchor USD/JPY in a range between 146.20 and 149.00, with short-term tests at the lower bound already met this week.
Inflation Data and Fed Rate Cut Bets Keep USD/JPY Capped
The U.S. Bureau of Labor Statistics reported consumer inflation climbing 0.4% month-on-month in August, pushing headline CPI to 2.9% YoY versus 2.7% in July. Core CPI held at 3.1%, in line with expectations. Despite the pickup in price pressures, labor market data revealed cracks: jobless claims rose to their highest level since October 2021, while nonfarm payrolls disappointed last week. Markets now fully price in a 25bp Fed rate cut on September 17, with growing odds for an additional two cuts by December. This dovish turn has dragged U.S. 10-year Treasury yields to a five-month low, reducing support for the dollar. Yet the yen has been unable to capitalize given Tokyo’s political backdrop and lingering doubts about near-term BoJ hikes.
