The USD/JPY pair recovered on Monday during the Asian session, climbing toward 147.40 after shedding nearly 1% in the previous session. However, further upside in the pair may be constrained as the Japanese Yen (JPY) finds strength following hawkish commentary from Bank of Japan (BoJ) Governor Kazuo Ueda over the weekend.
Speaking at the Jackson Hole Economic Symposium on Saturday, Ueda conveyed optimism that the conditions for a potential interest rate hike are gradually materializing. According to a Reuters report, Ueda noted that wage growth is no longer confined to large enterprises and is now spreading to small and medium-sized firms, a development supported by Japan’s increasingly tight labor market.
Core inflation above target keeps BoJ in play
Supporting the BoJ’s hawkish shift, data released on Friday showed that Japan’s core consumer inflation remained above the central bank’s 2% target for yet another month. Although the pace of inflation slowed for a second consecutive month, the Core Consumer Price Index (CPI)—which excludes volatile fresh food prices—rose 3.1% year-on-year in July, just above the median forecast of 3.0%.
The inflation trajectory, combined with strengthening wage dynamics, is reinforcing expectations that the BoJ could move away from ultra-loose monetary policy later this year—an increasingly significant tailwind for the Yen.
Fed dovish tilt could erode USD momentum
At the same time, the US Dollar (USD) could face fresh headwinds, as expectations for a Federal Reserve rate cut in September gained traction following dovish remarks by Fed Chair Jerome Powell at the same Jackson Hole event.
Powell acknowledged that risks to the labor market are rising, while reiterating that inflation remains a concern. However, he emphasized that policy decisions are not predetermined and that further tightening may not be necessary, particularly given the uncertain estimates around maximum sustainable employment.
The market is now pricing in a high probability of a 25-basis-point rate cut in the Fed’s upcoming September meeting, which could weigh further on USD strength and offer additional downside pressure on USD/JPY.
Outlook
While the USD/JPY’s short-term momentum remains to the upside, the convergence of dovish Fed signals and hawkish BoJ rhetoric suggests that any further gains may be limited. The pair could enter a consolidation phase or face downside risk if US economic data this week reinforces the Fed’s softening stance or if Japanese policymakers firm up rate-hike expectations.
