Will Fed rate cuts really be negative for USD/JPY?
pair is a critical issue for investors and currency strategists, particularly as we approach a possible Fed pivot in 2024.
Historically, USD/JPY did not always decline during Fed easing cycles. The key exception was during the 2007–2008 Global Financial Crisis , when the unwinding of the yen carry trade caused significant yen appreciation. Japan's foreign asset holdings have shifted from foreign bonds to foreign direct investment and equities over the past decade.
This ongoing capital outflow is structurally bearish for the yen. Retail investors in Japan have also increased their foreign equity exposure through investment trusts , and this trend is supported by the expanded Nippon Individual Savings Account scheme, which encourages long-term investment rather than short-term speculative flows.
The expectation of three 25-basis-point cuts by the end of 2024, rather than the 100+ basis points priced in by the market, further supports the view that USD/JPY could remain strong despite easing U.S. monetary policy. These pension funds are less likely to react to short-term market fluctuations, further reducing the likelihood of a yen appreciation.
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