Japanese Yen consolidates at 40-year lows against USD amid high intervention risks

Pressures on the BoJ to keep rates at low levels

The BoJ hiked interest rates to 1% in June, its highest level in the past 31 years, and markets are pricing in another rate hike before the end of the month. Japan’s Economic Minister Minoru Kiuchi, however, has urged the BoJ to align with the government’s initiatives to boost growth, a veiled call to temper their monetary normalisation plans.

The Fed, on the other hand, is showing an increasingly hawkish rhetoric, as concerns about the labour market dissipate, while inflation remains out of control. This is keeping a wide differential between US and Japanese Treasury yields, keeping the Yen under pressure.

Against this background, the risk that Tokyo steps in to support the Yen increases by the minute. Japanese officials have repeatedly emphasised that they are ready to act at any moment. This, however, is failing to deter speculative traders, as USD/JPY long positions remain near record highs, according to the US regulator. Markets are speculating about the timing of the next round of intervention that might take place on Friday to take advantage of the thinned trading volumes amid the US bank holiday.

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.