Japanese government cuts budget, affects Yen
In the trading session on February 28, the Japanese Yen (JPY) had a moment to increase against the USD but then quickly lost most of its increase. The main reason is the widespread strength of the US dollar, while the Japanese government has announced a plan to cut the budget. However, expectations that the Bank of Japan (BoJ) will continue to raise interest rates this year help limit the Yen's depreciation.
Japanese Prime Minister Shigeru Ishiba announced a budget cut for the 2025-2026 fiscal year to 115.2 trillion yen. At the same time, the government will also reduce the amount of newly issued bonds to 28.6 trillion yen. These measures show that Japan is implementing a fiscal tightening policy, which could ease inflationary pressures but also pose many challenges for the economy.
Expectations of interest rate increase from BoJ support Yen
BoJ Deputy Governor Shinichi Uchida stressed that Japan's inflation is approaching the 2% target. This raises expectations that the BoJ will continue to raise interest rates in the coming time.
The Statistical Institute of Japan also reported that the consumer price index (CPI) in Tokyo fell from 3.4% to 2.9% in February. The core CPI, which excludes fresh food prices, also fell to 2.2% from the previous month's 2.5%. In addition, industrial production continued to decline for the third consecutive month, with a decrease of 1.1% in January.
Despite signs of weakness in the economy, market risk sentiment is still boosting demand for the Yen - a safe-haven asset - helping it not fall too much against the USD.
USD is solid thanks to positive economic data
The USD continues to remain high as US economic data shows that inflation remains strong. US GDP grew 2.3% in the last quarter of 2024, in line with initial forecasts. The GDP price index - an important measure of inflation - also increased to 2.4%, higher than the previous forecast of 2.2%.
Some investors are concerned that US President Donald Trump's economic policies could increase inflation, forcing the US Federal Reserve (Fed) to keep interest rates higher for longer.
Fed officials, including Kansas City Chairman Jeff Schmid, Central Bank Chairman Cleveland Beth Hammack and Philadelphia Chairman Patrick Harker, all see inflation as a concern. They also believe that the possibility of the Fed cutting interest rates soon could be delayed.
Currently, the market is focusing on the US personal consumption expenditure (PCE) price index data, which is expected to be released in the near future. This is an important inflation measure that the Fed is closely monitoring. The result could affect the Fed's monetary policy, directly affecting the USD and USD/JPY exchange rate in the coming time.
According to Lao Dong, at 12:00 on February 28, 2025, the Yen exchange rate is currently anchored around 149.834 JPY/USD, the Yen decreased slightly by about 0.02%.
