The Japanese Yen (JPY) is the third most-traded currency in the world. Its pristine status as a safe-haven investment continues to place it in the limelight. During periods of increased market volatility, global investors flock to the Yen’s safety and surety. As Japan’s Economy Minister Ryosei Akazawa prepares to travel to the United States around May 30 for further trade negotiations, the dynamics surrounding the Yen’s value may play a crucial role in shaping discussions.
The strength of the Japanese Yen is very dependent on 4 major factors. These are Japan’s macroeconomic fundamentals, the monetary policy stance of BOJ, and the gap between Japanese and US bond yields. The BoJ sticks to its ultra-loose monetary policy. Unfortunately, this decision has continued to widen the gulf between the Bank of Japan and other central banks, notably the US Federal Reserve. This divergence, at the very least, calls into question the longer-term Yen value given the changing global economic landscape.
The Safe-Haven Appeal of the Japanese Yen
The Japanese Yen is considered the most important safe-haven currency, especially in times of market volatility. When uncertainty hovers over financial markets or geopolitical risks rise, investors flock to the Yen as a safe haven asset. Its stability and low volatility urge investors to turn into it rather than different currencies seen as riskier.
Historically, during periods of heightened global uncertainty, such as economic recessions or times of geopolitical strife, demand for safe-haven assets have increased. Because of this, the Yen’s value tends to appreciate during these times. No wonder Yen’s power to weather everything the market throws at it further cements this currency’s reputation as a safe haven for all investors.
Additionally, the Bank of Japan’s commitment to currency control plays a significant role in shaping the Yen’s trajectory. Their monetary policies drive Japan’s domestic economic condition but these policies impact the global perception of the Yen. The BoJ’s decisions are closely monitored by traders, as any changes could lead to substantial fluctuations in the currency’s value.
Monetary Policy and Yield Differentials
The Bank of Japan’s ultra-loose monetary policy has been a critical factor in determining the value of the Japanese Yen. By doing this, while continuing to hold interest rates low and aggressively pursue quantitative easing, the BoJ hopes to provoke stronger economic growth. This approach has left a notable widening policy rift among central banks. The US Federal Reserve’s even more hawkish turn has been widening the divergence even further.
One of the crucial levers the BoJ exerts is the differential between Japanese and US bond yields, which can have a huge impact on currency values. When US bond yields increase compared to Japanese yields it can provide upward pressure on the US Dollar relative to the Yen. More recently, this differential has expanded further, playing a small part in pushing USD/JPY higher to trading at 1143.80, on a broader constructive view from investors.
Equity and bond investors know all too well how US monetary policy shifts can hit markets with jarring slap, especially on currency pairings. Akazawa along with his peers, on their way to Washington to TPP negotiations. Yield differentials should be a major area of focus in driving international monetary cooperation and currency positioning.
Risk Sentiment and Future Prospects
Risk sentiment among traders is the most important determinant of the Japanese Yen’s value. In moments of market distress, investors have a tendency to flock to the more liquid and safe Yen. Once market confidence is restored, money will likely return to riskier assets, resulting in a depreciation of the Yen.
The outlook for the global economy continues to be murky, with many mixed signals affecting market forces. The looming unwinding of Japan’s ultra-loose monetary policy should help give the Yen even longer-term support. With economic conditions continuing to change, traders will be highly attuned to how these plays shift risk sentiment and currency valuations going forward.