- USD/JPY stands tall near a multi-decade high amid the big US-Japan rate differential.
- Intervention fears might hold back bulls from placing fresh bets around the major.
- Traders now look forward to the US ISM Manufacturing PMI for short-term impetus.
The USD/JPY pair kicks off the new week on a subdued note and consolidates its recent strong gains to the highest level since December 1986 touched on Friday. Spot prices currently trade with a mild positive bias around the 161.00 mark, though the upside seems limited in the wake of speculations about an imminent intervention by Japanese authorities to support the domestic currency.
In fact, Japan's Finance minister Shunichi Suzuki told a news conference on Friday that excessive volatility in the currency market is undesirable and that authorities will respond appropriately to such moves. Meanwhile, Japan appointed Atsushi Mimura as the new top foreign exchange diplomat on Friday. The move, however, does little to provide any respite to the Japanese Yen (JPY) as investors are uncertain about Atsushi's stance on currency policy. This, along with the wide interest rate differential between the United States and Japan, might continue to act as a tailwind for the USD/JPY pair.
The Bank of Japan (BoJ), so far, has failed to provide any cues about the timing of the next rate increase. In contrast, the Federal Reserve (Fed) sounded more hawkish at the end of the June policy meeting and forecasted only one interest rate cut in 2024. Moreover, the increasing odds of a Trump presidency raise worries about the imposition of aggressive tariffs, which could fuel inflation and trigger higher interest rates. This, in turn, lifts the US Treasury bond yields to a multi-week top and continues to underpin the US Dollar, lending additional support to the USD/JPY pair and validating the positive outlook.
The markets, meanwhile, are still pricing in a greater chance of a September Fed rate cut amid signs of easing inflation. The bets were reaffirmed by the US Personal Consumption Expenditures (PCE) Price Index, which confirmed the disinflationary trend as shown by the Consumer Price Index (CPI) and Producer Price Index (PPI) for May. This might hold back the USD bulls from placing aggressive bets and cap the upside for the USD/JPY pair. Traders now look to important US macro releases scheduled at the start of a new month, starting with the ISM Manufacturing PMI later this Monday, for a fresh impetus.
Japanese Yen FAQs
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.
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 current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
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 supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against 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.
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