USD/JPY Treading Water on BOJ Rate Hike Expectations and Weak Economic Data

The USD/JPY exchange rate has been hovering near its two-week low of 159.50, pressured by diverging expectations on Japanese and U.S. monetary policies.

Market expectations for a Bank of Japan (BOJ) interest rate hike in September remain elevated, with an approximately 80% probability of a 25-basis-point increase priced in.

Hawkish signals from the BOJ are supporting the yen, but Japanese economic data pose challenges to this policy outlook. Japan's real GDP grew by only 0.3% quarter-on-quarter in the second quarter, below market expectations and significantly lower than the first quarter.

The current trend of USD/JPY reflects a dual dynamic: the yen supported by policy expectations, and the dollar awaiting the release of Federal Reserve meeting minutes to gauge U.S. interest rate outlook.