The Japanese Yen is one of the most traded currencies in the world. It has yet to be dethroned as a safe-haven investment even during tremendous global economic volatility. The Yen exchange rate changes day by day and hour by hour. There are a number of interrelated factors driving its stability, including the overall health of the Japanese economy, the direction of monetary policy from the Bank of Japan, and the willingness of traders to take on risk.
In recent months, the Bank of Japan has maintained an ultra-loose monetary policy, creating a significant divergence with other central banks, including the US Federal Reserve. This policy divergence has broader consequences for the Yen’s value and its role in international markets.
The Role of the Bank of Japan
There’s no question the Bank of Japan (BoJ) has a huge say in how high or low they value the Yen. Because its monetary policy decisions affect not only the domestic economic conditions that they direct influence, but because they affect international perceptions of the currency. Second, The Yukitaka BoJ’s repeated commitment to an ultra-loose monetary policy was a hallmark of its approach over the last few years.
This policy has resulted in a continuously widening differential between Japanese and US bond yields, which is affecting global investment decisions. As US bond yields continue to climb, the appeal of US investments will only strengthen, creating further downward pressure on the Yen. Unlike other central banks, the BoJ has remained resolute in its commitment to this policy. Its goals to jumpstart the economy include maintaining low interest rates and conducting large-scale asset purchases.
The BoJ’s recent push represents a further tightening of their currency control mandate. By holding rates down, the Fed hopes to spur additional borrowing. This approach aims to increase demand in an economy that has faced years of recession and deflationary forces. Accordingly, even a suggestion of a change in this orthodoxy can cause instantaneous movements in the Yen’s value.
Economic Performance and Risk Sentiment
The Japanese economy performance plays a big role in determining the value of the Yen. Japan’s economic figures including gross domestic product (GDP) growth, unemployment, price inflation are all followed religiously by Japan forex traders and investors. Strong economic performance would help support confidence in the Yen, preventing a depreciation, and indeed contributing to an appreciation.
That’s right During times of chaos or market stress, investors run to currencies they perceive as safe. They look for predictability under unpredictable weather. The Japanese Yen usually does well in this type of trend, as YEN is considered a flight-to-safety asset. When demand for the Yen increases, it tends to strengthen the Yen against riskier assets. Changing course carries risks, especially in an unpredictable economic environment.
Risk sentiment among traders is another key factor impacting Yen’s value. When geopolitical tensions rise, or when economic conditions present new uncertainties, market participants begin looking for safety. During periods of turmoil, they naturally gravitate towards stable hands like that of the Yen. Together, this dynamic forms a powerful feedback loop. By exporting risk aversion, Japan’s current policy heightens demand for Yen, further strengthening the Yen’s position in global markets.
Diverging Central Bank Policies
The divergence between the monetary policies of the BoJ and other central banks, particularly the US Federal Reserve, has become increasingly pronounced. The Fed has already begun the process of unwinding its accommodative bias as economic conditions begin to rebound. At the same time, the BoJ is maintaining its ultra-loose course. This yawning policy gap has serious effects on currency traders and investors.
Given the significant US interest rate effect, investors are very interested in deploying more capital to US assets. Such a change would be likely to exert strong downward pressure on the Yen. Conversely, should the BoJ signal any intentions to taper its asset purchases or raise interest rates, it could provide much-needed support for the Yen.
Just last week, Japan’s Finance Minister Katsunobu Kato recognized that Japan must keep an eye on global economic trends—including their influence on Japan’s currency. He concluded by stressing that any changes to the international monetary policy framework may justify a re-evaluation of the course Japan should take economically.