Japanese Yen weakens as USD strengthens, intervention looms

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Japanese Yen’s downside could be restrained as Japanese authorities may intervene to limit the currency’s weakness.
Japan’s Finance Minister Katayama said authorities stand ready to act in FX markets.
The US Dollar strengthens as expectations for near-term Fed rate cuts fade.

USD/JPY recovers losses from the previous session, trading near 159.40 during Asian hours on Tuesday. However, the upside of the pair may be limited as the Japanese Yen (JPY) could find support from potential intervention by Japanese authorities. Japan’s Finance Minister Satsuki Katayama said on Tuesday that financial markets are experiencing elevated volatility, adding that the government is ready to respond if needed, including in the foreign exchange market.

Meanwhile, Bank of Japan (BoJ) Governor Kazuo Ueda stated that underlying inflation is gradually moving toward the bank’s 2% target. Ueda added that the central bank will guide monetary policy appropriately to achieve stable and sustainable inflation. However, the BoJ is expected to keep interest rates unchanged at 0.75% on Thursday while maintaining the option for further policy tightening.

The USD/JPY pair strengthens as the US Dollar (USD) gains on fading expectations for near-term Federal Reserve (Fed) interest rate cuts amid rising inflation concerns tied to the Middle East conflict. Surging crude oil prices have raised fears of higher inflation, reducing prospects for near-term monetary easing.

Markets widely expect the US central bank to keep its benchmark interest rate unchanged in the 3.50%–3.75% range at Wednesday’s meeting, according to the CME FedWatch Tool. If the Fed holds rates steady, it would mark the second consecutive pause after the central bank’s previous easing cycle.

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.