Japan’s Kihara says market moves will be monitored with a strong sense of urgency

Market movements are being closely monitored by Japan’s administration with a strong sense of urgency, Deputy Chief Cabinet Secretary Minoru Kihara said on Wednesday during European trading. He also noted: “Markets move on various factors.”

Japanese Yen Drivers Explained

The Japanese Yen responds to economic performance, policy and sentiment

Japan’s economic performance broadly underpins the value of the Japanese Yen (JPY), which ranks among the most actively traded currencies worldwide. More specific influences include Bank of Japan policy, the gap between Japanese and US bond yields, and traders’ appetite for risk, alongside other factors.

Bank of Japan decisions shape the Japanese Yen’s value

Currency control forms part of the Bank of Japan’s mandate, making its actions particularly important for the Yen. Direct intervention in currency markets has occasionally been used by the BoJ, usually to weaken the currency. However, political concerns among Japan’s main trading partners discourage frequent intervention. Between 2013 and 2024, the BoJ’s ultra-loose monetary policy weakened the Yen against its major peers as its policy stance increasingly diverged from those of other leading central banks. The gradual withdrawal of that exceptionally loose policy has more recently provided the Yen with some support.

Japanese and US bond yield differentials influence the Japanese Yen

By maintaining ultra-loose monetary policy over the past decade, the BoJ increasingly diverged from other central banks, most notably the US Federal Reserve. The resulting widening in the yield gap between 10-year US and Japanese bonds benefited the US Dollar relative to the Japanese Yen. That differential is now narrowing as the BoJ’s 2024 decision to phase out its ultra-loose policy coincides with interest-rate reductions by other major central banks.

Risk aversion tends to support the Japanese Yen

Investors often regard the Japanese Yen as a safe haven, favouring it during periods of market stress because of its perceived dependability and stability. As a result, market turbulence is likely to lift the Yen against currencies considered riskier investments.

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