Societe Generale’s Kit Juckes notes that the Japanese Yen is weaker as Prime Minister Takaichi signals apprehension about further rate hikes and China retaliates with export controls on Japanese firms. He highlights that USD/JPY has decoupled from rate differentials and argues that stronger Japanese growth, rather than Bank of Japan policy tweaks, is needed for sustained Yen gains.

Yen weakness decouples from rate spreads

"The yen is weaker this morning, in part because Prime Minister Takaichi has ‘voiced apprehension to more rate hikes’ according to Mainichi and in part, in reaction to China adding further Japanese firms to an export control list as retaliation for the PM’s comments about Taiwan."

"Rate or yield differentials are currently completely decoupled from USD/JPY, and while the correlation between yen rates and the exchange rate is easy to see (over this short timeline) it suggests that raising rates ought to be yen friendly!"

"USD/JPY, which has risen since 2020 as US yields have risen and Japanese ones have remained anchored, isn’t currently tracking rates, relative or otherwise."

"Fiscal concerns have eased somewhat, and the threat of intervention has helped the yen, but what the BoJ does or doesn’t do is unimportant."

"The yen needs stronger Japanese growth, more than anything else, for recent modest gains to continue."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)