Fed and BoJ Policy Paths Keep Pressure on USD/JPY

The USD/JPY exchange rate remains under pressure due to interest-rate differentials between the US and Japan. The spread between US and Japanese two-year government bond yields currently stands at around 2.81 percentage points, making dollar-denominated assets more attractive.

This yield advantage is driving carry trades, where investors borrow in low-yielding yen to invest in higher-yielding US assets. As long as the yield differential remains elevated, the incentive to hold dollars over yen is unlikely to disappear.

The Bank of Japan's policy normalization has strengthened expectations that policymakers will raise interest rates again during the second half of the year. Most economists now expect the BoJ to raise interest rates to around 1.25% by December, which would narrow the interest-rate gap with the US but only gradually.