USDJPY
Over the past year, the yen has appreciated significantly against the dollar.
Interest Rate Decisions
Federal Reserve (Fed):
The Fed’s policy rate remains at 4.25–4.50%, with markets increasingly expecting a rate cut as US inflation data cools and labor market data softens.
Bank of Japan (BoJ):
The BoJ’s short-term policy rate is set at 0.5% (unchanged since March 2025), and the central bank continues a cautious approach, with no recent hikes or major policy shifts.
10-Year Government Bond Yields
US 10-Year Treasury Yield:
Recently declined to around 4.348% after softer US inflation data, reflecting expectations of Fed easing.
Japan 10-Year Government Bond Yield:
Stands at approximately 1.45%, having edged lower amid strong demand at recent bond auctions and the BoJ’s continued yield curve control.
Implications for USDJPY
The narrowing yield differential between US and Japanese 10-year bonds (now roughly 2.93%) is a key driver of the yen’s recent strength against the dollar.
As US yields fall on expectations of Fed rate cuts, the appeal of the dollar over the yen diminishes, supporting further yen appreciation.
The BoJ remains cautious, but with inflation in Japan still below target and growth subdued, there is little pressure for rate hikes, keeping the policy gap wide but shrinking as the Fed pivots dovish.
Conclusion
The USDJPY has weakened as US yields fall and the Fed signals a dovish tilt, while the BoJ holds steady.
The pair is likely to remain under pressure if US yields continue to decline and the Fed moves closer to rate cuts, narrowing the US-Japan yield gap further.
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