The USD/JPY exchange rate remains sensitive to monetary policy divergence, with market expectations shifting towards a potential Federal Reserve (Fed) rate cut on December 10 and a Bank of Japan (BOJ) interest rate hike on December 19. This development is expected to support Tokyo’s efforts to stabilize the Japanese Yen (JPY). The BOJ is closely monitoring inflation, as the weak JPY has sparked market attention, and Governor Kazuo Ueda is becoming less concerned about the impact of tariffs.
Meanwhile, the market is awaiting US President Donald Trump’s announcement on the next Fed Chair, with Kevin Hassett emerging as a credible and Senate-confirmable candidate. Hassett is considered market-friendly and may shift policy expectations away from current Fed Chair Jerome Powell. US Treasury Secretary Scott Bessent has indicated that Trump may announce his Fed Chair pick before Christmas, which could have significant implications for monetary policy.
The potential for a Fed rate cut and a BOJ hike has gained traction, with markets firming up their bets on these outcomes. This has provided more credibility to Tokyo’s intentions to stabilize the JPY, which has been under pressure due to the weak currency. The BOJ’s focus on inflation is also driven by the weak JPY, which could boost inflation and support the economy.
Overall, the USD/JPY exchange rate is expected to remain volatile in the coming weeks, driven by monetary policy divergence and the uncertainty surrounding the next Fed Chair. The market will be closely watching Trump’s announcement and the subsequent reaction of the Fed and the BOJ. With the potential for a shift in monetary policy, investors will need to be cautious and adapt to the changing landscape. The next few weeks will be crucial in determining the direction of the USD/JPY exchange rate and the overall outlook for the global economy.