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Increased recession fears caused by the Fed's aggressive policy continues to weigh down on the US dollar. Amid the dollar's slump, the Japanese yen has notably recovered after its earlier downturn.
USD/JPY has already decreased by 0.25% this week. The pair is about to end its 3-week rally, which saw the US dollar increase by more than 6% against the Japanese yen.
At the time of writing, USD/JPY traded at 134.66. Several days ago, the pair reached 136.71, the highest level since October 1998.
A weaker US dollar has pushed USD/JPY downwards from its 24-year high. The US currency lost its upwards momentum this week following statements by Fed chairman Jerome Powell before the Senate Banking Committee.
On Thursday, Jerome Powell once again stated that the Federal Reserve is pledged to fight record high inflation despite the threat of an economic slowdown.
The chairman's hawkish comments intensified recession fears of market players. As a result, the yield of 10-year US Treasury bonds, which is a key support of USD, tumbled to a 2-week low in the night from Thursday to Friday.
The narrowing gap between yields of Japanese and US sovereign bonds gave support to the Japanese yen and put pressure on USD/JPY. The usage of interest rate hikes by central banks to bring soaring inflation under control is jeopardizing the global economic recovery.
Global economic prospects worsened further after the release of disappointing eurozone PMI data.
As this week comes to a close, investor demand for the Japanese currency has risen amid increased concerns over a global recession. JPY is traditionally regarded as a safe haven asset.
According to the latest Japanese CPI data, core inflation reached 2.1% in May, exceeding the Bank of Japan's target level of 2% for the second month in a row.
CPI including food and energy increased in May by 0.8% year-over-year. Food prices surged by 2.7%, the fastest increase since 2015.
Experts say the latest inflation data could make the BoJ change its opinion on price growth, which is currently considered transitory by the regulator.
The current inflation in Japan is a byproduct of Western sanctions against Russia and the interest rate hike in the US. It is not triggered by strong domestic consumer demand.
This year, the yen dived due to a 3 percentage point gap between US and Japanese government bonds. The weaker JPY propelled up the price of imported goods skywards, pushing up costs of living in Japan.
The Japanese regulator has only one way to resolve the situation - follow a hawkish course instead of its current yield curve control policy.
The governor of the Bank of Japan has repeatedly stated that the regulator would stick to its highly dovish monetary policy until a strong wage increase become a key factor driving inflation.
As prices of goods and services increase alongside discontent of consumers, the BoJ could quickly reconsider its position.
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