162.30: Japanese Yen falls back to near 40-year lows as intervention risks loom

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The Japanese Yen (JPY) has resumed its broader downtrend against the US Dollar (USD) on Monday following a mild relief last week.

USD/JPY bounces up to 162.30, drawing closer to 40-year highs at 162.80.
A broad-based wave of US Dollar strength is driving FX markets on Monday.
Analysts at MUFG warn that the market might be underpricing the BoJ's commitment to normalize its monetary policy.

The Japanese Yen (JPY) has resumed its broader downtrend against the US Dollar (USD) on Monday following a mild relief last week. The USD/JPY has appreciated nearly 0.6% on the day so far, hitting session highs at around 161.30, with the 40-year high of 162.84 coming closer and risks of Tokyo intervention increasing exponentially.

US Dollar strength is driving markets on Monday as investors come to terms with the likelihood that the Federal Reserve will hike interest rates this year, despite last week’s Nonfarm Payrolls disappointment.

Beyond that, comments by Iranian authorities reiterating their willingness to control the Strait of Hormuz and to collect fees from vessels crossing it have raised concerns about friction with the US, which has previously said this would be unacceptable.

Japanese authorities, in the meantime, are showing unusual mutism, leaving investors suspicious of a change in tactics. Market sources, including Reuters, suggest that Japanese authorities might have opted to step in without prior warnings to squeeze speculators and optimise the impact of their actions.

Looking further, MUFG’s Lee Hardman suggests that the market is underpricing the hawkish Bank of Japan’s stance, at a change in fundamental scenario in favour of the battered JPY: "The ongoing steepening of the Japanese yield curve stands in contrast to flatter curves in the US, UK and Germany. The combination of the weaker yen and rising long-term JGB yields reflects some renewed fiscal concerns in Japan, and concerns that the BoJ remains behind the curve in tightening monetary policy."

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.