Japanese Yen weakens as rising risk aversion lifts US Dollar

USD/JPY rises as the US Dollar gains amid rising risk aversion, an escalating Middle East crisis, and soaring oil prices.
Hotter-than-expected US consumer inflation data drove market pricing for an upcoming Federal Reserve rate hike to 87%.
The Japanese Yen may strengthen due to faster BoJ tightening, unwinding carry trades, and domestic capital repatriation.

Akhtar Faruqui FXStreet

USD/JPY rebounds after posting modest losses the previous day, trading around 154.60 during European hours on Monday. The pair appreciates as the US Dollar (USD) gains amid rising oil prices and growing Federal Reserve (Fed) rate hike bets.

The Greenback receives support from market caution amid fears of a protracted Middle East crisis, which has kept oil prices elevated and delivered an inflationary shock to the global economy. Crude oil prices rebounded toward nearly four-month highs following a drone attack that forced Saudi Arabia to shut down a major crude pipeline, a critical route traditionally used to bypass the Strait of Hormuz.

Furthermore, recent data from the US Bureau of Labor Statistics have intensified pressure on the Federal Reserve to tighten monetary policy further. The CME FedWatch tool indicates that financial markets have priced in an 87% probability of a quarter-point rate hike at the next meeting, up sharply from 59% the previous week.

US Consumer Price Index (CPI) rose 0.4% month-on-month in August, pushing the 12-month increase to 3.4%. Meanwhile, core CPI increased by 0.3% monthly, outpacing both prior and forecasted 0.2% gains.

However, the upside of the USD/JPY cross could be restrained as the Japanese Yen (JPY) could find tailwinds from a shifting market landscape, driven by expectations of faster Bank of Japan (BoJ) policy tightening, the unravelling of carry trades, and increased capital repatriation by domestic players. Markets anticipate the central bank will raise borrowing costs to 1.25% to address lingering price pressures, pushing rates to a peak not seen in over three decades.

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.

Author

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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