Title: Japanese Yen Continues to Struggle Amid BOJ Policy Divergence and Market Volatility
Original article from Mitrade: https://www.mitrade.com/insights/news/live-news/article-6-964734-20250717
Credit: Mitrade News Team
The Japanese Yen (JPY) has continued to decline against major global currencies as investor sentiment and central bank policy divergence weigh heavily on the currency’s short-term prospects. With a backdrop of varied inflation data and central banking developments, the Yen’s weakening trend showcases deeper macroeconomic pressures and global financial dynamics.
This article explores the underlying reasons behind the persistent depreciation of the Yen, adds insights from broader financial resources, and analyzes what the future holds for the currency.
Overview of the Yen’s Performance
Over recent weeks, the Japanese Yen has fluctuated sharply against its counterparts, such as the US Dollar (USD), the Euro (EUR), and the British Pound (GBP), with the USD/JPY pair reaching fresh multi-decade highs.
As of mid-July 2025:
– The USD/JPY pair traded around the 162.00 level, marking another wave of weakness for the Yen.
– The EUR/JPY and GBP/JPY pairs also saw gains, reflecting overall bearish sentiment towards the Yen.
– Despite sporadic interventions or hints of intervention by Japanese authorities, markets perceive these as insufficient to reverse the broader trend.
Key Drivers Behind the Yen’s Decline
1. Bank of Japan’s Monetary Policy Remains Ultra-Dovish
– The Bank of Japan (BOJ) continues to maintain ultra-loose monetary policy, standing in stark contrast with the hawkish stances taken by other major central banks.
– BOJ interest rates remain near or below zero, with limited signs of meaningful tightening.
– Inflation in Japan, while moderating slightly, has not compelled a policy shift. This has caused interest rate differentials to further widen.
– Markets are pricing in prolonged divergence, reducing appetite for the Yen.
2. Inflation Differentials
– The U.S., Eurozone, and U.K. have been grappling with higher, more persistent inflation rates than Japan.
– As a result, the U.S. Federal Reserve, European Central Bank (ECB), and Bank of England (BoE) have all raised rates significantly in the past two years.
– Japan’s inflation, while ticking above 2%, is still seen by the BOJ as fragile and largely driven by external energy costs rather than strong domestic demand.
– This leads investors to favor currencies with higher real yields.
3. Currency Carry Trade Momentum
– The Yen has become a preferred funding currency for carry trades, where investors borrow in Yen to invest in higher-yielding assets elsewhere.
– As long as global interest rate differentials remain elevated, the unwinding of Yen carry trades is unlikely.
4. Interventions and Verbal Warnings by Japanese Authorities
– Japanese finance officials have persistently issued warnings about speculative or excessive currency moves.
– The Ministry of Finance (MoF) intervened in currency markets in 2022 and 2023 when the Yen slid rapidly past certain thresholds.
– However, these interventions tend to have limited and temporary effects unless backed by changes in monetary policy.
Market Reactions in Mid-July 2025
– The U.S. Consumer Price Index (CPI) data released recently showed a slight cooling in inflation, but not enough to discourage expectations of higher-for-longer interest rates from the Federal Reserve.
– Federal Reserve officials, including Chair Jerome Powell and several regional governors, signaled that despite slowing inflation, their primary focus remains price stability. Rate cuts are unlikely to be entertained until late 2025.
– These comments reinforced the dollar’s strength across the board, further depressing the Yen.
– U.S. 10-year Treasury yields remain above 4.4%, offering a solid yield premium over Japan’s virtually zero-y
Read more on USD/CAD trading.