The potential impact of U.S. Federal Reserve rate cuts on the USD/JPY exchange rate is a key issue for investors, especially with a possible Fed pivot in 2024. Analysts from BofA suggest that while many expect Fed rate cuts to weaken USD/JPY, the relationship is more complex.
Historically, Fed rate cuts haven’t always led to a decline in USD/JPY, except during the 2007–2008 Global Financial Crisis. BofA highlights that Japan’s capital flow shift towards foreign direct investments (FDI) and equities, which are less sensitive to interest rate changes, may limit yen appreciation even if U.S. rates fall. Moreover, Japan’s ongoing demographic challenges and increased foreign equity exposure through investment trusts further reduce the likelihood of a strong yen.
Without a severe U.S. recession, moderate Fed rate cuts are unlikely to boost the yen. The expectation of gradual 25-basis-point cuts through 2024, rather than aggressive easing, suggests USD/JPY will remain elevated. However, if the U.S. faces a recession, a larger series of cuts could push USD/JPY down to 135 or lower. Conversely, a strong U.S. economy could push the pair above 160 by 2025.
The Bank of Japan’s policy changes are expected to have less influence on USD/JPY compared to the Fed’s policies, as Japan’s economy is more sensitive to U.S. economic conditions.
https://www.investing.com/news/forex-news/will-fed-rate-cuts-really-be-negative-for-usdjpy-3611368


