The Japanese yen experienced significant losses but has since recovered most of its losses. Currently, in the European session, USD/JPY is trading at 157.09, showing a slight increase of 0.06%. Earlier, the yen had dropped by as much as 0.80%, reaching 158.25 and hitting a six-week low before bouncing back.
The Bank of Japan recently held a meeting where it opted to remain cautious, which disappointed market expectations. The BoJ decided to keep interest rates within the range of 0% to 0.1% and announced plans to reduce its bond purchases, signaling a move towards scaling back its extensive monetary stimulus. However, the central bank disclosed that it would not unveil the specifics of its tapering strategy until the July meeting, meaning that the current pace of bond buying remains unchanged.
Investors were let down by the absence of a rate hike announcement or any indication of future rate increases from the BoJ. With the lack of clarity regarding the reduction of bond purchases, the central bank indicated a slow approach towards adjusting its monetary policies, leading to a significant drop in the Japanese yen.
The weak performance of the Japanese economy, with a contraction of -1.8% y/y in GDP during the first quarter and a 1.2% m/m decline in household spending in April, could potentially delay any plans for the BoJ to tighten its policies. In the US, the latest data on producer prices for May showed a softer than expected outcome, with a 0.2% decrease compared to the previous month. This decrease, along with a lower yearly PPI of 2.2%, has raised speculations of a possible rate cut in September, with a 61% probability of a quarter-point cut according to CME’s FedWatch, up from 46% a week ago.