Fed-BoJ Policy Divergence Fails to Save Yen from Global Market Volatility

The divergence in monetary policies between the Federal Reserve and the Bank of Japan has historically driven the USD/JPY exchange rate. However, as of late 2025, this expected policy gap is failing to provide sustained support for the yen.

The Fed maintains a restrictive stance with interest rates at their highest level in over two decades, while the BoJ continues to operate with negative short-term rates and yield curve control. This contrast has traditionally pushed capital flows toward the dollar, pressuring the yen.

However, recent market behavior suggests that the relationship between policy divergence and currency value is not as straightforward as it once seemed. Despite the Fed's hawkish signals, the yen has not weakened as sharply as some models would predict, and at times, it has even strengthened against the dollar.