Japanese Yen Shows Stability After Turbulent Week – A Review
By Kenny Fisher (original content source: MarketPulse – https://www.marketpulse.com/news/japanese-yen-stable-after-dismal-week/)
The Japanese yen regained a measure of stability after experiencing significant volatility during the previous week. Though the currency has been under enormous pressure due to fundamental macroeconomic shortcomings and dovish monetary policy, its behavior early in the new week has seen some normalization. This analysis explores the current status of the yen, the economic indicators influencing it, and broader market sentiment impacting currency trading.
USD/JPY Consolidates Following Sharp Gains
– The USD/JPY pair began the week trading in a tighter range, showing signs of consolidation. Following a disastrous trading week that witnessed the currency losing significant ground, the pair remained relatively unchanged in early trading sessions.
– At the start of the week, the USD/JPY hovered around 157.00, reflecting slight upward momentum but without continuing the dramatic climb seen earlier.
– Previously, USD/JPY jumped over 2% in a single week, in part due to rising US Treasury yields and a stark contrast in monetary policy between the United States and Japan.
Despite Tokyo refraining from further intervention, financial markets remained cautious. Japanese authorities have indicated a willingness to address excessive currency depreciation if needed. However, no specific timeline or trigger has been revealed, leaving the situation fluid.
Japanese Yen’s Weakness and Government Interventions
– The yen has faced significant downward pressure for much of 2024, driven primarily by the diverging interest rate environment between Japan and major global economies.
– While the US Federal Reserve continues to keep rates elevated to address sticky inflation, the Bank of Japan (BoJ) maintains a dovish policy stance, only recently making minor adjustments to its nearly two-decade-long ultra-loose monetary policy strategy.
– In April, the yen plummeted to a 34-year low against the dollar, reaching as weak as 160.17. This extreme level prompted speculative efforts toward a coordinated intervention by Japanese monetary authorities.
– Following the steep decline, Japan’s Ministry of Finance (MoF) and Bank of Japan are reported to have conducted an intervention costing nearly 9.8 trillion yen (approximately USD 62 billion) to stabilize the currency. The USD/JPY subsequently retreated to around 153.00, a level seen as a psychological threshold by markets.
– While the intervention yielded short-term results, the yen quickly resumed its weakening trend. The market remains skeptical of the lasting impact of such moves in the absence of a clear policy shift from the BoJ.
– Japanese Finance Minister Shunichi Suzuki has reiterated the government’s commitment to responding to speculative and excessive FX movements, though he has stopped short of confirming any specific intervention strategies.
Bank of Japan’s Dovish Policy Remains a Drag
– The key issue suppressing the yen is the BoJ’s reluctance to aggressively tighten monetary policy, even as inflation in Japan hints at rising underlying pressures.
– The BoJ raised interest rates earlier in 2024, ending its negative rate regime for the first time since 2007. However, their increase was minimal and not sufficient to narrow the interest rate gap with the US and other major western economies.
– As the US maintains interest rates above 5%, Japan’s rates are still close to zero, making carry trades more attractive. Investors borrow in yen at low cost and invest in higher-yielding currencies like the dollar, pushing the yen down further.
– BoJ Governor Kazuo Ueda has maintained a cautious approach, noting that wage growth and sustained inflation are necessary before implementing further tightening. However, many analysts believe that the BoJ has waited too long to change course.
– Markets are currently pricing in another potential rate hike from the BoJ in the months ahead, possibly in July, depending on incoming inflation data.
Japanese Inflation and Wages Not in Sync
– Another complicating factor for the Bo
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