Japanese Yen ticks up above 162.00 US Dollar and eases intervention risks

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The Japanese Yen (JPY) posts minor gains amid a somewhat softer US Dollar (USD) on Tuesday. The USD/JPY pair has pulled back to session lows just below 162.00 from Monday's highs in the 162.40 area, easing concerns about an immediate intervention by the Japanese authorities.

USD/JPY has eased to session lows below 162.00 after rejection at 1262.40 on Monday.
The US Dollar Index wavers without a clear bias after pulling back from last week's highs.
Traders await the release of the Fed's minutes on Wednesday to make investment decisions.

The US Dollar Index (DXY), which measures the value of the Greenback against a basket of currencies, hovers without a clear direction within a tight range around 101.00, giving some oxygen to the battered JPY. The DXY shows a corrective structure from last week’s highs near 101.80, as the disappointing Nonfarm Payrolls figures released last week prompted markets to dial down bets of immediate Federal Reserve rate hikes.

Japanese data released on Tuesday has failed to provide any significant support to the Yen. Labour Cash Earnings moderated beyond expectations in May, easing pressure on the BoJ to tighten its monetary policy; Overall Household Spending contracted for the sixth consecutive month, yet less than expected, and the Leading Economic Index grew below expectations.

Markets remain skeptical about BoJ's tightening commitment

In this context, the Yen remains unable to put a significant distance from the 40-year lows at 162.84 hit last week. The wide divergence between the Bank of Japan’s (BoJ) interest rates and those of the other major central banks remains a heavy weight for any JPY recovery.

Beyond that, investors remain reluctant to buy into the BoJ’s commitment to continue tightening interest rates, aware that Japanese Prime Minister Sanae Takaichi is a firm advocate of keeping a loose monetary policy to support economic growth.

Looking forward, Quek Ser, FX Analyst at the United Overseas Bank (UOB), sees chances of further Yen recovery if the USD fails to break above the 162.40 area: “The likelihood of USD closing below 160.60 will remain intact as long as 162.45 (‘strong resistance’ level) is not breached.”

The US calendar is thin on Tuesday, and investors are likely to look from the sidelines ahead of the release of the minutes from the last Federal Open Market Committee (FOMC) meeting, due on Wednesday.

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.