USD/JPY at Crossroads: BoJ and Fed Decisions Loom Large

The USD/JPY currency pair is facing a crucial week ahead of the Federal Reserve and Bank of Japan's monetary policy decisions. The pair has been volatile, with a rapid decline from its peak after reaching four-decade highs for USD/JPY. This shift in momentum brings to the forefront the main drivers of the pair: monetary policy and FX intervention.

The Bank of Japan is expected to continue its policy normalization path, with another hike anticipated at the next meeting on Friday, September 18. This move would take rates out of accommodative territory and into the lower bound of neutral. Policymakers are resolute in preventing underlying inflation from significantly surpassing 2%, with pressures tied to high crude prices, expansive fiscal policies, and the AI boom lifting corporate profits and wages.

The Federal Reserve's decision on Wednesday, September 17, is also highly anticipated, as it faces mounting pressure to contain stubborn inflation. Chair Warsh has refrained from forward guidance but emphasized that underlying trends in inflation have not improved, and officials will have work to do unless they are convinced that prices are converging to target.

Japanese authorities have confirmed cumulative operations of over ¥27 trillion for FX intervention this year, with the most recent campaign of ¥15,399.3 billion deployed from late July to late August. The incoming Fed and BoJ meetings offer fresh opportunities for Japanese authorities to step into the FX market again, but currency operations remain a tactical instrument rather than a strategic currency driver.