USD/JPY trades flat around 158.50 while focus shifts to Japan’s election

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The USD/JPY pair trades in a tight range around 158.50 during the European trading session on Thursday, but is close to its yearly high of 159.45 posted on Wednesday.

USD/JPY flattens around 158.50 after retracing from the yearly high of 159.45.
Threats of Japan’s intervention have helped the Japanese Yen to regain ground.
The USD Index trades higher as the Fed is unlikely to cut interest rates later this month.

The USD/JPY pair trades in a tight range around 158.50 during the European trading session on Thursday, but is close to its yearly high of 159.45 posted on Wednesday. The pair corrects slightly as the Japanese Yen (JPY) gains ground amid hopes of Japan’s intervention to counter one-sided excessive moves against the currency.

Japan Chief Cabinet Secretary Seiji Kihara said on Wednesday that the government “will take appropriate action against excessive moves as it is important for currencies to move in a stable manner reflecting fundamentals”.

However, the outlook of the Japanese Yen remains uncertain amid hopes of looser fiscal policy this year. Investors expect the budget announcement by Prime Minister (PM) Sanae Takaichi for next year will have big spending plans, for which she is considering an early snap election to gain more seats in parliament’s lower house.

Currently, Japan’s ruling Liberal Democratic Party (LDP) doesn’t have a majority in parliament’s lower house, which is limiting its ability pass legislation. According to a Reuters report, the odds of PM Takaichi getting more seats in the lower house are high.

Meanwhile, the US Dollar (USD) trades marginally higher amid expectations that the Federal Reserve (Fed) will not cut interest rates in the policy meeting later this month. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.1% higher to near the monthly high at 99.26.

(This story was corrected at 11:23 GMT to say in the last paragraph that the Fed will not cut interest rates in the policy meeting later this month, not in the year)

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.