Yen struggles to hold intervention gains and drifts towards 158.00

USD/JPY ticks up to levels near 158.00 after hitting 155.23 lows earlier this week.
Concerns about the Japanese Government's tax-cutting plans are weighing on the JPY.
Weak UDS data and dwindling hopes of immediate Fed rate hikes are keeping the USD from rallying further.

Guillermo Alcala FXStreet

The Japanese Yen (JPY) is ticking lower against the US Dollar (USD) on Thursday, trimming gains after an exceptional US-Japan coordinated intervention triggered a 4.5% appreciation late last week. The USD/JPY pair has returned to levels a few pips shy of 158.00 after hitting lows at 155.23 on Monday, despite the broad-based US Dollar weakness.

Analysts at Rabobank note that "days after the Japanese Ministry of Finance –and the US Treasury– intervened in FX markets to prop up the Yen, the cabinet approved a plan to cut the sales tax on food for two years." In parallel, "the government is planning handouts to lower-income households," in response to the high costs of living that are weighing on PM Takaichi’s popularity.

Rabobank highlights that "the unfunded tax plan has drawn criticism from both the opposition and people within the ruling LDP, as well as market participants," even though "today’s 30-year bond auction showed little sign of concern or investor fatigue." In their view, "the real litmus test may be the currency," with investors likely to judge the credibility of the policy mix through the Yen’s performance.

Markets await US Nonfarm Payrolls figures

All this notwithstanding, the Yen remains supported by a weak US Dollar, as US macroeconomic data has failed to convince investors, fuelling concerns about a soft Nonfarm Payrolls reading on Friday. The market consensus forecasts 80K new payrolls in July, up from June's 57K, but recent data has cast doubt about the momentum of the US labour market.

Wednesday's ADP Employment Change report disappointed with a 44K net employment growth in July, less than half of June’s 98K rise and well below the 70K anticipated by the market consensus. Also on Wednesday, the ISM Services Purchasing Managers’ Index (PMI) confirmed a healthy growth rate but missed estimates, with employment contracting.

Against this background, traders have cut back hopes of a Federal Reserve (Fed) rate hike to 54% from 67% earlier this week, according to the CME Group's FedWatch Tool, which is keeping US Dollar bulls subdued.

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

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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