Japanese yen rallies to three-week high

The Japanese yen strengthened to around 146.5 per dollar on Thursday, reaching its highest level in three weeks as growing expectations for multiple Federal Reserve rate cuts this year weighed on the U.S. dollar.

The move followed softer-than-expected U.S. inflation data, which suggested that President Donald Trump’s recently imposed tariffs have not yet translated into broader price pressures. Signs of labor market cooling — including weaker hiring data and rising jobless claims — reinforced the dovish outlook for U.S. monetary policy.

Adding to the momentum, U.S. Treasury Secretary Scott Bessent publicly called for several rate cuts over the coming months and even suggested that the Fed could begin its easing cycle with a more aggressive 50-basis-point reduction in September. Such a move would likely narrow the interest rate differential between U.S. and Japanese government bonds, improving the yen’s relative appeal against the dollar.

On the home front, the Bank of Japan is under increasing pressure to reconsider its reliance on a specific inflation measure tied to domestic demand and wage growth — a metric that has been instrumental in justifying its cautious approach to tightening policy. Critics argue that the measure may be underestimating underlying price pressures in the broader economy, potentially delaying necessary policy adjustments.

Governor Kazuo Ueda has maintained a measured tone, reiterating that “underlying inflation” remains below the BOJ’s 2% target, signaling that any further rate hikes will depend on clearer evidence of sustainable price and wage growth. However, recent yen strength — if sustained — could influence the BOJ’s stance by easing imported inflation pressures, potentially complicating its efforts to reach the inflation target.

Beyond monetary policy, investor positioning ahead of key global events, including U.S.–Russia talks and the extension of the U.S.–China trade truce, has contributed to a shift in safe-haven flows. The yen’s traditional role as a low-yielding refuge currency may become more pronounced if geopolitical risks intensify in the weeks ahead.

Looking forward, the yen’s trajectory will be shaped by a delicate interplay between Fed policy signals, domestic inflation trends, and global risk sentiment. A decisive Fed shift toward aggressive easing could push USD/JPY lower, but renewed domestic economic softness or a BOJ reluctance to tighten further could limit yen gains.