Japanese Yen rises as Japan urges pension funds to invest in domestic assets

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The USD/JPY pair tumbles to around 161.50 during the early European trading hours on Friday. The Japanese Yen (JPY) edges higher against the US Dollar (USD) after the reports that Japan plans to encourage pension funds to increase their holdings of domestic financial assets.

USD/JPY attracts some sellers to near 161.50 in Friday’s early European session.
The prospect Japanese pension funds will invest more domestically to support the Japanese Yen.
Fed's Williams doesn't expect a sustained surge in energy prices.

Japan’s Finance Minister Satsuki Katayama said that the government is pursuing measures that would include the Government Pension Investment Fund (GPIF) to make "substantially greater investments in Japanese financial assets,” per Reuters. Analysts said this move could offer greater support to ‌the battered currency than intervention.

Traders reduce their bets of a rate hike from the US Federal Reserve (Fed) this year, weighing on the Greenback against the JPY. New York Fed President John Williams said on Thursday that despite the resumption of hostilities in the Middle East, he was not looking for a sustained rise in ‌energy prices over the remainder of the year.

Expectations for a rate hike of at least 25 basis points (bps) at the July meeting dropped to 24.6% from 31% in the previous session, but up from 18.2% a week ago, according to the CME FedWatch tool. For the September policy meeting, markets are pricing in a 62.3% chance of a hike, down from the 66.6% on Wednesday but an increase from the 54.1% a week earlier.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.