Bank of Japan Comments Weigh on Yen: USD/JPY Outlook Faces Volatility as U.S. Data Looms

The Bank of Japan’s recent comments, which signaled a lower risk of inflation overshooting in the near term, have prompted a wave of yen weakness. This weakness allowed USD/JPY to find strong support and push higher, especially as traders digest the implications of the Fed’s dovish 50bps rate cut last week. While the initial reaction to the Fed’s decision caused broad dollar selling, the less hawkish signals from the BoJ gave USD/JPY some room to recover, with the pair rising in line with U.S. Treasury yields.

Looking forward, the fate of USD/JPY largely hinges on upcoming U.S. economic data, including PMI reports, consumer confidence figures, and most notably, the core PCE deflator expected later this week. If U.S. data prints strong—particularly the PMIs—the pair could continue its upward trajectory, potentially testing higher levels as yields rise in anticipation of sustained U.S. economic resilience.

However, the risks remain significant. The yen is highly sensitive to shifts in U.S. monetary policy and broader risk sentiment. If U.S. data surprises to the downside—especially on inflation—expect the market to price in even more aggressive Fed cuts, which could push USD/JPY lower. Friday’s core PCE data, expected at 0.2% MoM, could be a key trigger. Should the reading disappoint, coming in at 0.1% MoM or lower, it could reignite concerns over a hard landing for the U.S. economy, sending the dollar lower against the yen. 

Further complicating the picture, markets are currently pricing in 35bps of cuts for the November Fed meeting, with a possible 30-32bps more in December. This dovish outlook could weigh heavily on USD/JPY, especially if coupled with weak economic data. At the same time, the BoJ’s stance on keeping monetary policy ultra-loose in the near term leaves room for a continued push higher in the pair, as long as U.S. data remains robust.