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Japanese Yen weakens against the US Dollar as traders monitor intervention risks

  • USD/JPY edges higher on Friday as the US Dollar stabilizes, while intervention concerns linger.
  • Japan's Finance Minister reiterates that authorities are ready to respond to excessive currency moves.
  • The interest rate differential between Japan and the United States remains supportive of USD/JPY.

USD/JPY rebounds on Friday after falling nearly 0.90% the previous day, amid speculation that Japanese authorities may have intervened in the foreign exchange market after the Japanese Yen slid to a 40-year low earlier this week.

At the time of writing, the pair is trading around 161.25, rebounding from an intraday low of 160.49, its weakest level since June 18.

Traders remain alert to the possibility of intervention. On Friday, Japan's Finance Minister Katayama reiterated that authorities are "ready to act appropriately" in response to excessive currency fluctuations and are "coordinating closely with the US."

Meanwhile, the US Dollar (USD) is showing signs of stabilization after coming under heavy selling pressure following weaker-than-expected US Nonfarm Payrolls (NFP) data released on Thursday, which dampened expectations of an imminent Federal Reserve (Fed) interest rate hike.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading around 100.80 after falling to a two-week low of 100.56. The recovery in the Greenback is also limiting gains in the Japanese Yen.

The US Dollar's downside has remained limited as the weak NFP report only delayed expectations for a Fed interest rate hike. With inflation running well above the Fed's 2% target, the central bank is widely expected to maintain a restrictive monetary policy stance.

According to the CME FedWatch Tool, the probability of a September rate hike fell to 53% from 63% before the data release, shifting market expectations toward December, where the odds stand at 76.8%.

The Bank of Japan's (BoJ) tightening bias has done little to support the Japanese Yen, as traders continue to take advantage of Japan's relatively low interest rates through carry trades.

The wide interest rate differential between Japan and the United States keeps USD/JPY's broader bias tilted to the upside.

Bank of Japan FAQs

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.

Author

Vishal Chaturvedi

I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.

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