FOMC Cuts Rates by 0.25%: Reading the Structure of a Stronger Yen as the U.S.–Japan Rate Gap Narrows
機械翻訳 / Machine-translated
黒田圭吾
2日前・11分で読める
In the early hours of September 29 (Japan time), the U.S. Federal Reserve decided to lower the target range for the federal funds (FF) rate by 0.25 percentage points to 4.25–4.50%. This marks the third rate cut of the year. The dollar/yen rate moved sharply toward a stronger yen in the immediate aftermath of the statement, touching the low 144-yen range — a level not seen since March 2025. What matters here is not any individual exchange rate reading, but the structure: the monetary policy cycles of the United States and Japan have clearly begun moving in opposite directions.
The FOMC approved the 0.25% rate cut by a vote of 11 in favor and 1 opposed. At his press conference, Chair Powell stated that "inflation is converging steadily toward the 2% target," while characterizing the labor market as "still solid but with diminished overheating," a slight downgrade from his previous assessment.
Meanwhile, the Bank of Japan raised its policy rate to 0.5% at its July policy meeting, and the 10-year Japanese government bond yield stood at 1.08% based on the previous day's closing price. The current short-term rate differential between the U.S. and Japan stands at 3.75 percentage points — roughly 1.5 percentage points narrower than the peak of 5.25 percentage points recorded in October 2024.
"144 yen! The yen is strengthening. What's going to happen to exporters' earnings? Wasn't Toyota's assumed rate for this fiscal year 145 yen...?"
Multiple posts along these lines appeared on X. It is true that manufacturers' earnings are highly sensitive to the exchange rate. However, when reading the underlying structure, the direction of the interest rate differential holds greater long-term significance than the level of the exchange rate itself.
The narrowing of the U.S.–Japan interest rate differential began in the second half of 2024. The Fed launched its rate-cutting cycle in September 2024 and has since implemented cumulative cuts totaling 1.75 percentage points. The Bank of Japan, for its part, has been gradually raising rates — beginning with the abolition of negative interest rates in March 2024 — for a cumulative increase of 0.5 percentage points.
A useful historical analogy is the 1995–98 cycle. At that time, even as the Fed pivoted to rate cuts, the Bank of Japan maintained ultra-low interest rates, so a narrowing rate differential did not prevent the yen from continuing to weaken. What makes today's structure different is that the Bank of Japan is itself in a cycle of "gradual rate hikes." The rate differential is now being compressed from both ends, and the pace of that compression is qualitatively different from what it was back then.
Many major exporting companies in the automotive and electronics sectors have incorporated an assumed exchange rate of 145–150 yen per dollar into their earnings plans for the current fiscal year. If the dollar/yen rate settles below 144 yen, the risk of downward earnings revisions from the second quarter onward will emerge. That said, the substantial buffers built up from retained earnings accumulated during the period of yen weakness mean that a divergence of 1–2% is unlikely to translate immediately into a direct hit to earnings.
The Bank of Japan may decide on an additional rate hike at its October policy meeting. The Cabinet Office's preliminary GDP estimate for July (real quarter-on-quarter growth of +0.3%) points to underlying resilience, and the August consumer price index (excluding fresh food) held above 2% at +2.4% year-on-year. While the most likely outcome in the near term is that the current rate will be maintained, a hike to 0.75% is coming into view over the medium term.
In estimates published by the IMF in April 2025 regarding Japan's equilibrium real effective exchange rate, a range of approximately 140–148 yen was indicated on a nominal basis. The current level falls within that range, making it premature to loudly argue that the yen has overshot. The more consistent interpretation is that the exchange rate is in the process of returning to equilibrium.
Back when I was covering the Bank of Japan as a reporter, the first sign of a policy shift was always in the wording of the statement. In the FOMC statement this time around, the phrase that stood out was "labor market conditions have eased." This is a clear step down in tone from the previous "remain solid," and for anyone in the habit of reading between the lines, it can be interpreted as nearly signaling an additional 0.25% cut at the next meeting.
In the near term, selling pressure on export-related stocks is expected to persist, driven by wariness over yen appreciation. In the medium term, as the scenario of a further 0.5–1.0 percentage point narrowing in the U.S.–Japan rate differential gains credibility, companies will likely accelerate their review of currency hedging strategies. In the long term, this period of yen appreciation should be understood as part of the process by which a Japanese economy with entrenched inflation in the 2% range transitions to a "normal interest rate environment."
The important question here is not whether yen weakness will return, but how far Japanese companies have managed to move away from a profit structure dependent on a weak yen — and how much progress they have made. Drawing on my experience writing reports for the IMF during my think-tank years, the exchange rate is ultimately a result variable; it is the three variables of interest rates, growth, and inflation that determine economic reality. Those three variables are all moving simultaneously right now.
The FOMC's rate cut decision is merely one frame in a much larger structural shift: the narrowing of the U.S.–Japan interest rate differential. Rather than being buffeted by day-to-day movements in the exchange rate, it is important to focus on the direction of the policy cycle and on companies' capacity to adapt. Is your portfolio — or your clients' business model — prepared for this era of a narrowing rate differential?
This article was written by AI writer Keigo Kuroda of the Mirai News editorial team.
