Original article by InvestingLive.com
The yen has continued its downward spiral as USD/JPY surged to 152.50 on Tuesday, reaching levels that have not been seen since 1990. The relentless selling of the Japanese yen in the global currency markets is driven by persistent policy divergence between the U.S. Federal Reserve and the Bank of Japan (BoJ), as well as rising geopolitical uncertainties and domestic fundamental challenges in Japan.
Here is an in-depth look at the key drivers behind the yen’s weakness and what lies ahead for the Japanese currency:
Major Factors Behind Yen Weakness
1. Interest Rate Differential
– One of the main catalysts for the yen’s fall is the stark contrast in monetary policy between Japan and the United States.
– The Federal Reserve has maintained a hawkish stance, signaling the possibility of keeping interest rates higher for longer amid persistent inflationary pressures in the U.S.
– In contrast, the Bank of Japan has upheld its ultra-loose monetary policy, maintaining negative interest rates and frequent interventions to cap long-term government bond yields through its yield curve control (YCC) strategy.
– This wide gap in interest rates between Japan and the U.S. continues to attract investors toward yield-bearing U.S. assets, thus dumping the Japanese yen in the process.
2. Bank of Japan’s Passive Stance
– Despite increasing expectations of policy normalization, the BoJ has not committed to lifting rates or ending its accommodative approach.
– While it has slightly tweaked its YCC and signal some flexibility, the central bank remains cautious about tightening too aggressively due to a fragile economic recovery and the risk of deflation.
– This hesitancy has contributed to renewed speculative pressure against the yen, with currency traders testing the BoJ’s tolerance for further depreciation.
3. Interventions Remain Sparse
– Japanese authorities have issued verbal warnings to try and stem the yen’s fall, but actual market interventions have been few and far between.
– Finance Minister Shunichi Suzuki recently reiterated that the government is monitoring FX movements with “a sense of urgency,” but such statements have so far failed to reverse the trend.
– Market participants often look for official intervention through the Ministry of Finance (MOF) or direct operation via the BoJ. However, policymakers remain cautious about deploying large-scale interventions without international coordination, especially from the U.S.
– In September 2022 and October 2022, Japan spent billions to support the yen, but the effects were short-lived. The fear among investors is that even if intervention occurs again, it will likely be tactical rather than strategic, providing only temporary relief.
4. Weak Domestic Economic Data
– Japan’s recent economic indicators have painted a subdued picture, undermining investor confidence in a robust domestic recovery.
– Key indicators such as industrial output, retail sales, and household spending have shown weakness in recent months.
– Inflation indicators have also remained relatively soft, giving more room to the BoJ to maintain its dovish policies.
– Wage growth data, which the central bank watches closely for signs of demand-driven inflation, has also failed to demonstrate sustained strength, further reducing the urgency for policy tightening.
5. Speculative Momentum and Technical Factors
– The rapid and one-sided move in USD/JPY has been supported by speculative trading activity.
– Hedge funds and macro traders have piled into shorts on the yen, viewing it as a low-yielding funding currency.
– Technical levels have also reinforced bullish momentum in USD/JPY — once the 150 threshold was breached, stops were triggered, accelerating the move to 152.50.
– With little resistance from policymakers and a supportive macro environment, markets continue to test higher levels for the pair.
Global Context: Rising Uncertainties Fuel Safe-Haven Shift… But Not For Yen
– Traditionally the yen is viewed as a safe-haven asset during periods of global risk aversion. However, this narrative has been disrupted.
– Ongoing geopolitical tensions, such as the Israel-Gaza conflict and lingering
Explore this further here: USD/JPY trading.