Fed-BoJ Policy Gap Keeps USD/JPY Bulls in Control

The core macro narrative for USD/JPY remains the policy divergence between a Federal Reserve still weighing further tightening and a Bank of Japan maintaining an ultra-accommodative stance. With the Fed expected to pause in October before a possible December move, this gap is unlikely to narrow meaningfully in the short term.

Elevated US bond yields, a byproduct of this divergence, continue to attract capital into dollar assets, pressuring the yen lower. Even as lower energy prices ease some inflationary pressure, the underlying yield gap keeps USD/JPY biased toward further upside unless the BoJ signals a meaningful policy shift.

Markets will parse upcoming central bank commentary for any hints of narrowing divergence, which remains the single most important variable for USD/JPY direction into year-end.