USD/JPY drops to near 141.00 following BoJ’s Junko Nagakawa remarks

• USD/JPY continues to lose ground on dovish sentiment around the BoJ’s policy stance.
• The BoJ’s Nagakawa said the bank could adjust the degree of monetary easing if the economy and inflation perform as forecast.
• The CME FedWatch tool suggests full pricing with at least 25 basis points of Fed rate cuts in September.

USD/JPY is losing ground for the second day in a row, trading around 141.20 during Asian hours on Wednesday. The Japanese Yen (JPY) remains firm following comments from Bank of Japan (BoJ) Board Member Junko Nagakawa.

BoJ board member Nagakawa said the central bank may adjust the extent of its monetary easing if the economy and prices align with its forecasts. Despite the July rate hike, real interest rates remain deeply negative and accommodative monetary conditions persist. If long-term rates rise, the BoJ may reconsider its tapering plan during its policy meetings as appropriate.

The downside of the USD/JPY pair is also driven by the contrasting monetary policies of the Bank of Japan and the US Federal Reserve, which have encouraged the unwinding of carry trades and boosted demand for Japanese. BoJ Governor Kazuo Ueda reiterated the central bank’s commitment to continue raising interest rates, provided the Japanese economy meets the bank’s forecasts by fiscal year 2025.

The US dollar (USD) remains low as Treasury yields continue to fall ahead of US consumer price index (CPI) data due later in the North American hours. The upcoming inflation report could provide new clues about the potential extent of interest rate cuts by the Federal Reserve (Fed) in September. Moreover, the recent US labor market report cast doubt on the possibility of an aggressive Fed rate cut.

According to the CME FedWatch tool, markets fully anticipate a rate cut of at least 25 basis points (bps) by the Federal Reserve at its September meeting. The probability of a 50 bps rate cut fell slightly to 31.0%, down from 38.0% a week ago.