The USD/JPY pair remains one of the fastest-growing currency pairs. In the second quarter alone, the U.S. dollar has recovered against the yen by more than 1,000 points, soaring from 122.00 to 133.00 and hitting its highest in more than 20 years. Considering the pair's movements since the beginning of the year, the result is even more outstanding - the price rose by almost 2,000 points.
At the beginning of the year, the USD/JPY pair received support from an apparent divergence between the Federal Reserve and the Bank of Japan's monetary policies. Now, this contrast has become even more pronounced. The Fed has already begun its aggressive rate hike cycle to tackle inflation and prevent the consumer price index from rising even more.
Generally, higher borrowing costs tend to push the local currency up as local assets become more attractive to investors. This is exactly what is happening to the U.S. dollar. Let us recall that the Fed's management has repeatedly stressed the need to curb inflation, adding that the regulator is prepared to go to great lengths, including a 3-4% rate hike by year-end, which will undoubtedly serve as a tailwind for the dollar and U.S. bond yields.
Unlike the Fed, the Bank of Japan refuses not only to raise the key rate but also to scale back its monetary easing, placing more emphasis on maintaining economic activity rather than fighting inflation. Moreover, the Japanese regulator has even committed to unlimited quantitative easing, i.e., buying an unlimited amount of 10-Year Japanese government bonds and defending its 0.25% yield target.
This means that as soon as the bond yields rise, the Bank of Japan begins to buy them, bringing the yield back down. Unlike Japanese debt securities, the yield on United States 10-Year Treasury Note is kept around 3%, reflecting the influence of rising inflation expectations and the Fed's aggressive policy to accelerate the key interest rate.
Such a striking discrepancy between 10-year Japanese government bonds and U.S. 10-Year Treasury Note yields (0.25% versus 3% respectively) makes the U.S. dollar much more attractive for investors, luring them to allocate their funds in the U.S., not in Japan.
Earlier, when USD/JPY rose above the 130.00 resistance, market participants feared that possible intervention from the Bank of Japan could end the yen's selloff at any moment. But Bank of Japan Governor Haruhiko Kuroda soothed those fears at the BoJ meeting in June, confirming the regulator's commitment to maintaining a "powerful" monetary stimulus.
Moreover, the Bank of Japan has clarified that it considers such cost-push temporary, stressing that it won't prompt the regulator into tightening, even through verbal intervention. That being said, until the situation changes, the Fed's tight monetary policy against the ultra-soft BoJ stance will remain the key driver for the USD/JPY growth.