JPY/USD fell to a new weekly low during the Asian trading session on Thursday. This big swoon is sadly consistent with current trends in the market. This decline comes in the midst of a toxic cocktail of negative trends weighing on the currency’s stability. As one of the most traded currencies in the world, the Yen is seen as a safe-haven investment. A combination of unique economic factors and deliberate policy choices are weighing on its competitiveness in foreign markets.
The Yen’s value primarily depends on the state of the Japanese economy. Lastly, the policy on money supply set by the Bank of Japan (BoJ) is a key factor that influences its value. In recent months, the divergence between Japanese and US bond yields has increased sharply. This trend has unfavorably affected the Yen’s weakened state and strongly favored the USD. Risk sentiment among traders is another key factor in determining the currency’s overall direction.
Factors Influencing Yen’s Value
As has been the case for a long time, one of the biggest drivers of the Yen’s value has been the performance of the Japanese economy. Over the past four years, Japan’s inflation has consistently averaged above the BoJ’s target of 2%. Yet, in light of this, the central bank has been too hesitant to tighten monetary policy, keeping interest rates at all-time lows. This decision has created a widening gulf in monetary policy between us and other central bankers. Perhaps most conspicuously, the US Federal Reserve has moved towards a sharply tighter monetary policy.
This policy divergence has already had real-world implications in the currency market, most beneficially for the US Dollar vs. the Yen. Investors have responded to these varying policies by shifting their investments toward currencies perceived as more stable, further weakening the Yen’s position. In response, investors are hanging on every piece of economic data or statement by a central bank that might point the direction for future currency swings.
Moreover, the Yen typically has a strong inverse correlation with risk sentiment among traders. When times are economically unstable, investors tend to race towards safe-haven assets such as the Yen. This move typically strengthens the Yen’s value compared to other riskier currencies. In a stable or improving economic environment, risk appetite comes back, increasing safe-haven demand.
Recent Developments and Government Intervention
Japan’s Finance Minister Satsuki Katayama recently hinted at the possibility of joint intervention with the United States to address the Yen’s recent weakness. This statement signals that Japanese authorities are seriously thinking about intervention to stabilize their currency given the long and ongoing economic malaise Japan has suffered. This kind of intervention would act as a tailwind for the Yen, making it much harder for the Yen to fall further.
After recent disorderly selloffs of Japan’s bond markets, most Yen bulls have been reluctant to put on new positions. Investors are still worried as they determine the impact of these changes on the stability of the currency. Further complicating the situation, recent bond market turmoil has ignited fears regarding the risk of holding Japanese assets. Consequently, financial markets, especially currency trading is going through increased volatility.
According to market analysts, perhaps the biggest factor in driving sentiment towards the Yen is expectations for government intervention. Market participants would be encouraged by the appearance of Japanese authorities coming to defend the currency. Any reduction in its cost might lead to a corresponding appreciation in its worth. On the other hand, should their intervention prove unsuccessful or unwanted, the Yen could further falter against its American counterpart.
The Role of Bank of Japan Leadership
Look for commentary this week from new Bank of Japan Governor Kazuo Ueda. They’ll certainly determine the near-term direction of the Japanese Yen. Market participants too will be listening very carefully to what he says about monetary policy and the state of the economy. They are looking for help predicting future currency movements. Ueda’s likely view on whether to keep policy ultra-loose or telegraph any future changes would be majorly influential on investor sentiment.
Traders have been closely watching significant economic data from Japan and the US. They are ever-watchful for policy moves from central banks. Therefore, any change in overall interest rates or monetary policy has a huge effect on the spread between Japanese and US bond yields. This differential is one of the two main forces shaping the Yen’s value in the global market.