Japanese Yen strengthens on intervention warning, cooling US inflation

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USD/JPY edges lower to around 162.15 in Thursday’s Asian session.
Japan’s Katayama said ready to take appropriate action on currency anytime as needed.
Cooling US inflation curbs Fed rate hike bets.

The USD/JPY pair loses ground to near 162.15 during the Asian trading hours on Thursday. The Japanese Yen (JPY) strengthens against the US Dollar (USD) after verbal intervention from Japanese authorities. Traders await the release of the US June Retail Sales data later on Thursday for fresh impetus.

Traders remain on alert for possible intervention from Japanese officials. On Thursday, Japan’s Finance Minister Satsuki Katayama said that the authorities are ready to take appropriate action on currency anytime as needed. She added that the officials will track market trends and economic data to ensure fiscal sustainability.

Softer-than-expected US inflation data reinforced bets that the US Federal Reserve (Fed) can stay ‌patient on interest rate hikes, weighing on the Greenback. Data released by the US Bureau of Labor Statistics (BLS) on Wednesday showed that the US Producer Price Index (PPI) rose by 5.5% YoY in June, versus 6.0% in May (revised from 6.5%). This reading came in below the market consensus of 6.2%.

On a monthly basis, the PPI declined by 0.3%, compared to the 0.6% increase recorded in May (revised from 1.1%) and improved compared with the estimate for no change.

The probability for a rate hike in July was slashed to 9.6%, versus a 45% implied ‌probability at the start of the week. Markets still see even odds of at least a 25 basis points (bps) increase in September, according to the CME FedWatch tool.

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.