The Japanese Yen (JPY) remains to take the relative advantage outperformance against the still broadly more convincingly weaker USD. On Friday, the Yen recovered due to strong economic data from Japan. This release has the potential to be a milestone marker of collective economic optimism turning. The Yen is already one of the world’s most traded currencies. It’s the first place investors flock to during a flight to safe-haven assets in turbulent market conditions.
With recent economic indicators pointing towards positive growth, real wages in Japan have finally been positive over the last seven months. This improvement is a huge win for consumer confidence. Aside from some broader good news, this positive trend fits with a recently reported 1.4% increase in household spending compared to last year. In sharp contrast, Japan’s consumer inflation rate hit a record 3.6% y/y in July, underscoring persistent price pressure.
The Bank of Japan (BoJ) has an outsized impact on the Yen given the scope of negative rates. It does this by effectively—not just technically—effectuating its monetary policy. This contrasts sharply with the BoJ’s continued ultra-loose monetary stance. Its use has generated an enormous policy rift with the other central banks around the globe. We know that economic conditions are never static. As they decide, one factor that’s very important for driving Yen is the relation between Japanese and US bond yields.
Economic Indicators Support Yen Strength
Having recently undergone two rounds of monetary easing, the latest data from Japan has provided a ray of sunshine for both the economy and the Yen. This new announcement illustrates that we’re seeing real wage increases. That means consumers will have to spend $99 billion more this year, increasing their disposable income, enhancing spending and creating economic growth. What’s more, growth in household spending accelerated to 1.4% in July, a sign that American consumers are beginning to react to the tailwinds of improving wage conditions.
These advances are occurring at a moment when inflation is top of mind for many. The consumer inflation rate crawled back up to 3.6% in July, a surprising growth that indicates persistent price pressures on the economy. The effects of rising prices on currency values can go in different directions. Still, the real wage growth and increase in consumer spending show that Americans have cause for confidence in their financial situations.
Japan today finds itself in a similar time of economic transition. Going forward, the Yen’s performance will certainly remain closely tied to such indicators. Investors will have to watch carefully to see how these trends play out and what impact that has on the larger economic picture.
Bank of Japan’s Influence on Currency Value
Historical and current policies of the Bank of Japan play a major role in determining the value of the Japanese Yen. The real culprit, many believe, is the Federal Reserve which has maintained an ultra-loose monetary policy for years. This hawkish approach has produced an ever widening chasm between Fed policy and that of the rest of the world. This divergence changes the equation for investors on risk and return. When there’s uncertainty in the world, most of the time it causes the Yen to be a more attractive currency.
The BoJ’s promise to keep short-term interest rates low keeps bond yields down in Japan. When Japanese bond yields stay lower than their US equivalents, it normally exerts downward pressure on the Yen. Risk sentiment has been very negative and traders have been vigorously looking for the exit. Therefore, due to Yen’s standing as a safe-haven currency, Yen demand may increase.
Additionally, the BoJ’s mandate of currency control helps stabilize the Yen’s value against fluctuations caused by external factors. As the global economy changes, so will our response. Its decisions will have a major impact on what the market expects from investors and what it does to currency development.
Impact of Risk Sentiment on Currency Fluctuations
One of the main countercurrents weighing on the Japanese Yen is the risk sentiment among traders. In times of uncertainty or market volatility, investors tend to flock to safe-haven currencies. This flight to safety increases the value of the Yen compared to more unstable currencies. This typical Yen behavior further enforces the Yen’s status as a safe haven asset, especially during times of global economic turmoil.
Participants are the market have all eyes set on tomorrow’s US Nonfarm Payrolls (NFP) data. Their opinions are sure to shape trading action in the Yen. Better-than-expected US employment figures would likely lift the Dollar. Conversely, disappointing figures could boost demand for safe-haven assets such as the Yen.
Additionally, changes in global risk appetite can worsen movements in current values. Uncertainties remain, exacerbated by geopolitical conflict and economic turmoil. Consequently, the Yen is likely to remain on a strengthening trend against currencies widely viewed as riskier holdings.