USD/JPY slumps to 149.50 as hopes for BoJ’s policy normalization escalate

• USD/JPY drops sharply to 149.50 as bets in favor of BoJ lifting negative rate escalate.
• Improving outlook for Japan’s wage growth would keep inflation sustainably above 2%.
• Investors await Fed Powell’s testimony for fresh guidance on US interest rates.

The USD/JPY pair falls sharply to 149.50 in Wednesday’s London session. The asset come under pressure as the Japanese Yen strengthens after the Jiji News Agency reported that some members of Bank of Japan’s (BoJ) Monetary Policy Committee (MPC) would favor an exit from ultra-loose monetary policy stance at the March policy meeting.

Last week, BoJ board member Hajime Takata said that the central bank’s goal of maintaining inflation above 2% inflation on a sustainable basis is ‘finally in sight’.

The Japanese Yen is expected to broadly outperform if the BoJ lifts negative interest rates, which it has been maintaining from more than a decade as inflationary pressures were unable to sustainably remain above 2%. The reasoning behind inflation remaining below 2% has been vulnerable wage growth. The outlook for wage growth is improving, fanning discussions of quitting the expansionary policy stance. 

Meanwhile, the US Dollar weakens as market expectations for Federal Reserve (Fed) rate cuts in the June policy meeting escalate. The CME FedWatch tool shows that that traders see a little over 57% chance for a rate cut by 25 basis points (bps) in the June meeting. The chances for a rate cut were around 52% on Tuesday.

Going forward, the US Dollar will be guided by Fed Chair Jerome Powell’s testimony before Congress at 15:00 GMT. Fed Powell will provide fresh guidance on when the central bank will start reducing interest rates.