Japanese Yen edges up from long-term lows amid higher intervention risks

Fear of a joint US-Japan intervention

These risks took shape earlier on Tuesday, following an online meeting between Japanese Finance Minister, Satsuki Katayama, and the US Treasury Secretary, Scott Bessent. The meeting boosted market speculation about a potential Tokyo-Washington coordinated action to support the JPY if the pair exceeds the mentioned 40-year high.

Katayama said that the discussion dealt with the situation in financial markets and failed to confirm if an intervention was on the table, but the timing of the meeting has raised the alarm bells.

The fundamental backdrop, however, remains US Dollar-supportive. Recent US data and the Federal Reserve’s (Fed) rhetoric have prompted investors to ramp up bets on monetary tightening in the second half of the year. This is boosting US Treasury yields and keeps Yen recovery attempts limited.

In the geopolitical front, the high level of uncertainty surrounding the US-Iran peace deal is not helping to shore up the Yen either. The talks have failed to set a clear date for the reopening of the Strait of Hormuz, and the risk of further escalation in Oil prices remains alive, putting additional pressure on the Yen.

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.