On Tuesday, the USD/JPY pair retreated to the 155.00 mark, influenced by a shift towards risk aversion in the markets and swirling rumours that the Bank of Japan (BoJ) might scale back its bond-buying program, bolstering the Japanese Yen (JPY) and exerting downward pressure on the USD/JPY. A cutback in bond purchases is expected to exert upward pressure on Japanese bond yields, which have a strong correlation with the JPY.
Concurrently, the US Dollar (USD) experienced a modest recovery following a significant drop the previous day when the US ISM Manufacturing PMI reported lower-than-anticipated figures for May, casting doubts on the strength of the rebound.
The downturn in US manufacturing was primarily attributed to a reduction in New Orders and Prices Paid, hinting at potential constraints on future growth and diminished inflation expectations. Consequently, this led to increased speculation that the Federal Reserve (Fed) might slash interest rates, with the likelihood of a rate cut in September climbing to approximately 65%, as per the CME FedWatch tool.
The USD/JPY saw a decline of over half a percent on Tuesday, partly due to market whispers initially reported by Bloomberg News, suggesting that the BoJ is contemplating a decrease in its quantitative easing (QE) program’s bond purchases.
Should this policy adjustment be enacted, it would diminish the demand for Japanese Government Bonds (JGBs), causing yields to rise (which inversely affects bond prices) and favourably influencing the Yen, which is closely linked to bond yields.
Brown Brothers Harriman (BBH) stated on Tuesday, “It is rumoured that the BoJ may deliberate on trimming its bond purchases as soon as the upcoming week’s meeting. Policymakers are expected to discuss the optimal timing to decelerate its bond-buying, currently at about JPY6 trillion ($38.4 billion) per month, and whether the BoJ should offer more clarity to enhance predictability.”
BBH further noted, “The BoJ’s willingness to discuss this issue, even as JGB yields rise, demonstrates its commitment to ongoing policy normalization.