The USD/JPY currency pair is actively declining, driven by the overall weakening of the U.S. dollar. The U.S. Dollar Index today hit an 8-month low, falling to the 101 level for the first time since January of this year. However, the pair's downward trend is not only driven by the weakening greenback but also by the strengthening yen. If you look at key cross-pairs involving the Japanese currency (specifically GBP/JPY, EUR/JPY), you'll see that the yen is dominating, supported by a favorable fundamental backdrop.

Last week, data on Japan's economic growth in the second quarter was released, which turned out stronger than forecasts, increasing the likelihood that the Bank of Japan will raise interest rates again this year, following similar moves in July and March.

Specifically, the country's GDP grew by 0.8% in the second quarter on a quarterly basis. This is the highest growth rate since the first quarter of 2023. The indicator came in positive, as most experts had expected a more modest increase of 0.5%. In the first quarter, there was a decline of 0.6%.

On an annual basis, Japan's economy grew by 3.1%, significantly exceeding the forecasted level of 2.1%, especially considering that GDP had contracted by 2.3% in the first quarter.

Consumer spending in the second quarter increased by 1.0%. This positive trend was observed for the first time in five quarters, driven by a substantial rise in average wages. Wages grew by an average of nearly 5.2% – the highest growth rate in the last three decades. Additionally, consumer spending was boosted by the recovery in car sales after some automakers resumed production (factories corrected issues identified during the state certification process).

Other components of the report indicate that exports increased by 1.4%, imports by 1.7%, business capital investments by 0.9%, and government spending by 0.1%.

The unexpectedly strong data release favored the yen. Japan's economy accelerated more than expected, supported by investments in housing and government spending, private consumption, and business expenditures. The positive report allowed USD/JPY sellers to strengthen their positions, especially since the U.S. dollar remains weak and vulnerable. As recently as Friday, the pair was trading within the 149 level, reaching a daily high of 149.35. However, today, sellers have brought the pair down to 145.20—a 400-point drop in just two trading days.

It's worth noting that the dollar is declining today despite a light economic calendar. The downward trend is driven by overall market sentiment. First, relative calm prevails in the Middle East. For several weeks, the American (and not only) press had been heightening tensions, claiming that Iran was "on the verge" of attacking Israel in response to the assassination of Hamas political leader Ismail Haniyeh in Tehran. Last Friday, the media again circulated reports that Iranian forces could strike Israeli targets as early as this weekend. However, these apocalyptic predictions did not materialize, and the safe-haven dollar fell out of favor as risk aversion eased.

Additionally, the U.S. dollar is losing ground due to dovish signals from the Federal Reserve ahead of the economic symposium in Jackson Hole.

On Sunday, two Federal Reserve representatives made relatively dovish comments, putting additional pressure on the greenback. For example, Chicago Fed President Austan Goolsbee stated that the central bank should not delay addressing the issue of rate cuts, as maintaining restrictive policy longer than necessary "could have negative consequences." His colleague, San Francisco Fed President Mary Daly, also indicated that she is ready to support a rate cut at the September meeting. According to her, recent inflation reports have given her more confidence that inflation is under control.

Overall, the market has little doubt that the Federal Reserve will begin easing monetary policy in September. The only question is by how much the regulator will cut the rate. Currently, the scales are tipping in favor of a less dovish scenario (a 25-point rate cut). However, Jerome Powell, who will speak this Friday at the economic symposium, could very well shift the balance toward a 50-point scenario. The likelihood of a 50-basis-point rate cut is now almost 30%, according to CME FedWatch data. Given this fundamental backdrop, the dollar is struggling to find support and is weakening across all major pairs.

The USD/JPY pair retains the potential for further decline. Corrective pullbacks can be seen as opportunities to open short positions with targets at 145.00 and 144.50.