Japanese Yen: Policy-regime shift backs JPY against US Dollar – DBS

A recent shift in policy regime has bolstered the Japanese Yen (JPY) against the US Dollar (USD), according to a report from DBS Group Research. Following a joint US-Japan intervention and heightened expectations of further Bank of Japan (BoJ) tightening, traders have exited short JPY positions. The political backing for structural reform and potential normalization of BoJ rates in late September are strengthening the hawkish rate hike scenario.

This policy-regime change advantage for the JPY contrasts with the credibility of the European currency. Speculators pulled back from their short JPY positions after July's US-Japan intervention and a change in expectations towards further BoJ tightening. By opposing Prime Minister Sanae Takaichi's fiscal policies, Bessent has given the BoJ greater leeway to normalize interest rates.

Additionally, Bessent has shifted the perception of "Takaichinomics" from inflation-driven reflation to deregulation, investment, and shareholder-friendly structural reform. Even former tightening skeptics, such as Takuji Aida, an economic adviser to Takaichi, are now endorsing the need for higher rates, intensifying expectations for a hawkish hike on September 18.

The AUD/USD pair dipped to a one-and-a-half-week low around 0.7140 during the Asian session on Monday, though it lacks follow-through. As of now, the USD/JPY pair is gaining some traction at the beginning of a new week, nearing the 154.00 mark during the Asian session, reversing a portion of Friday's losses. However, the price remains within a range observed over the past week and near a seven-month low, as traders anticipate upcoming central bank events.