The recent adjustment of expectations regarding the Federal Reserve (Fed) and the Bank of Japan (BoJ) has significantly impacted market sentiment. Investors are increasingly doubtful about the likelihood of a rate cut by the Fed in November, a stark contrast to earlier predictions of a 25 basis point or even a 50 basis point reduction. This shift, alongside strong US economic data, has fostered optimism about a soft landing for the US economy, leading to a resurgence in carry trades that utilize the JPY as a funding currency. With the BoJ expected to maintain its accommodative stance until at least 2025, the interest rate differential is likely to favor the USD, further exerting pressure on the JPY. Additionally, political developments, such as Donald Trump’s resurgence in presidential polls against Kamala Harris, have further buoyed USD/JPY as investors prepare for a potentially competitive election. However, increasing long carry trades in this environment—marked by volatility surrounding the upcoming US presidential election and ongoing weaknesses in China’s economy—may prove overly ambitious.

Moreover, Japan's recent labor market data revealed a disappointing 3.0% year-on-year increase in cash earnings for August, slightly below expectations, while real wages adjusted for inflation declined by 0.6%. This marks the first decline in three months and highlights the challenges confronting the Japanese economy, as the BoJ seeks sustained wage growth to justify future interest rate hikes. Economic Minister Akazawa's comments regarding the fall in real wages indicate a recognition of the potential risks to domestic consumption and overall economic health. While there are signs that Japan is making progress toward a wage-price cycle, the complete transition has yet to be achieved. Given the prevailing economic conditions, the divergence in monetary policy between the Fed and BoJ, and the mixed signals from labor and inflation data, the JPY is likely to remain under pressure in the near term. Market participants are preparing for continued USD strength amid uncertain global economic dynamics.

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