The following is a rewritten version of the original article titled “USD/JPY: The Rising Heat Under Tokyo’s Floorboards,” authored by Benjamin Sherry and published on Investing.com. The original article can be accessed here.
Title: USD/JPY: Mounting Pressure on the Yen and Japan’s Strategic Dilemma
Author: Based on the work of Benjamin Sherry
As 2024 progresses, market sentiments surrounding the USD/JPY currency pair continue to sharpen. Japan’s monetary policies, still easing while global peers tighten, are amplifying pressure on the yen, pushing USD/JPY closer to psychologically and technically sensitive territory. In this context, the actions—or inactions—of Japan’s Ministry of Finance (MoF) and the Bank of Japan (BoJ) take center stage.
The Dollar-yen exchange rate is a window into broader macroeconomic themes, particularly the divergence between Japanese and U.S. monetary policy, shifting rate differentials, and the ever-relevant intervention threat from Tokyo. This analysis delves deeper into the economic and policy dynamics influencing this crucial FX pair in recent months and what may lie ahead for investors and policymakers.
A Weak Yen: A Consequence of Diverging Monetary Policies
At the heart of the yen’s persistent weakness lies the aggressive interest rate divergence between the Federal Reserve and the Bank of Japan:
– The Federal Reserve has pushed its benchmark interest rate to above 5% since early 2023 to fight inflation, boosting demand for the dollar across the board.
– In contrast, the BoJ has continued with ultra-accommodative policies, only recently making small steps toward normalization, including ending its negative interest rate policy in March 2024.
Despite that rate hike and modest policy tweaks such as ending yield curve control and ETF purchases, the yen remains pressured. The BoJ’s short-term policy rate still hovers near zero, making it unattractive relative to other developed market currencies.
In essence, carry trade dynamics—where investors borrow in low-yielding currencies (like the yen) and invest in higher-yielding assets—remain highly unfavorable for the yen, keeping it vulnerable.
Key factors driving this pressure include:
– Lack of aggressive follow-up by the BoJ after its March policy shift
– Expectations that future BoJ hikes will be slow and limited
– Ongoing U.S. economic resilience leading to a delay in rate cuts from the Fed
The USD/JPY Rate Nears Intervention Levels
As the dollar gained renewed momentum, USD/JPY surged toward levels not seen since October 2022, when Japan last intervened in the FX market to support its currency. This has sparked market speculation that the MoF may soon step in again.
At the time of the last intervention, the pair had crossed the key 150 mark, prompting action from Japanese authorities. Now, with USD/JPY trading above 155, investor attention is once again fixed on possible official responses.
Several indicators suggest mounting tension and a potential intervention backdrop:
– Verbal warnings from Japanese officials have intensified, signaling growing discomfort with FX volatility
– The yen’s real effective exchange rate is hovering near multi-decade lows, exacerbating the issue of imported inflation
– Any potential intervention would likely follow similar mechanics as seen in 2022, potentially using foreign reserves to buy yen
However, a crucial difference now is the global rate environment. Back in 2022, intervention came amid rising U.S. Treasury yields and persistent Fed tightening. Today, U.S. inflation shows signs of easing, and rate cut discussions have regained prominence, even if delayed. This dynamic complicates Tokyo’s calculus.
Why Japanese Intervention Is Not Guaranteed
Despite the rising USD/JPY rate, actual FX intervention remains a controversial and unpredictable tool. Japan has traditionally been cautious in such interventions, preferring orderly functioning of markets over direct price management.
Several factors make intervention a risky and less-effective move:
1. Limited Long-Term Impact:
– Japan’s 2022 intervention succeeded only
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