US and Japan reaffirm their agreement not to manipulate FX rates

Additional takeaways

The US Treasury and Japan’s Ministry of Finance reaffirmed their partnership and agreed to continue close consultations on macroeconomic and foreign exchange matters.
Both sides reiterated that exchange rates should be market-determined, warning that excess volatility and disorderly movements can undermine economic and financial stability.
They reconfirmed commitments under IMF rules to avoid manipulating FX rates or the international monetary system for unfair advantage.
They restated the G7 pledge that fiscal and monetary policy should serve domestic objectives using domestic tools, not targeting exchange rates.
Agreed that macroprudential or capital flow measures will not be used to target exchange rates.
Confirmed that government investment vehicles such as pension funds invest abroad for risk-adjusted returns and diversification, not to influence exchange rates.
Concurred that FX intervention should only be considered to address excessive volatility or disorderly market conditions.
Committed to publicly disclose any FX intervention operations on at least a monthly basis.
Stressed the importance of transparent exchange-rate policies and practices.

Market reaction

As of writing, the USD/JPY pair was up 0.05% on the day at 147.30.

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.