USD/JPY picks up to levels past 156.00 amid an improving market mood

BoJ tightening hopes likely to support the Yen

Ueda put investors on their heels on Monday, affirming that the bank was contemplating the “pros and cons” of raising interest rates in December. These comments crushed investors’ appetite for risk, triggering generalised declines in stocks and government bonds and sending the Yen rallying across the board.

A well-received Japanese Government Bond auction earlier on Tuesday calmed investors' fears, although risk appetite remains frail so far.

Data from the US released on Monday added to evidence of the softening economic momentum. November’s ISM Manufacturing Purchasing Managers Index (PMI) revealed the sector’s activity contracted for the ninth consecutive month, with new orders and employment indicators deteriorating and inflation growing.

These figures add pressure on the US Federal Reserve to cut interest rates next week and probably a few more times this year. The BoJ, on the contrary, seems determined to tighten its monetary policy further in the coming months. This monetary policy divergence is expected to keep US Dollar rallies limited.

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.