The Japanese Yen (JPY) remains on its back foot against a stronger US Dollar (USD) on Wednesday, with the USD/JPY pair approaching 40-year highs at 161.95 again. The wide differential between the Bank of Japan’s (BoJ) interest rates and those of the world’s major central banks is keeping the Japanese Yen under pressure, and offsetting the impact of verbal interventions by Japanese officials.
Japan’s Finance Minister Satsuki Katayama reaffirmed earlier this week Tokyo’s commitment to “respond appropriately to currency moves at any time,” repeating a message conveyed by different Japanese authorities over the last few weeks.
Previously, Katayama held an online meeting with US Treasury Secretary Scott Bessent, which raised speculation about a joint operation to shore up the JPY, yet the positive impact on the Yen has been negligible.
Interest rate differentials are crushing the Yen
The fundamental background, however, is strongly unfavourable for the JPY as the comparatively low BoJ interest rates make the Yen the currency of choice for carry trades. This practice consists of borrowing a low-yielding currency and exchanging it for a higher-yielding one to pocket the differential, and is likely to intensify as the Fed is expected to hike rates at least once this year.
Against this background, Reuters reports that former BoJ policymaker Sayuri Shirai affirmed at the Reuters Global Market Forum that the USD/JPY pair might rally as far as 165.00 if the Fed meets market expectations and finally hikes borrowing costs this year. Shirai foresees interest rate differentials and doubts about Tokyo’s appetite for intervention will keep weighing on the JPY.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.