The USD/JPY pair edges higher to around 160.55 during the early Asian session on Thursday. The Japanese Yen (JPY) weakens to a near six-week low against the US Dollar (USD) after a hot US inflation report fuels expectations for higher-for-longer US Federal Reserve (Fed) interest rates. Markets are on high alert for foreign-exchange intervention by Japanese authorities.
US inflation accelerated in May to the fastest pace in more than three years as the war in Iran pushed up energy prices, the US Bureau of Labor Statistics (BLS) revealed on Wednesday. The US Consumer Price Index (CPI) rose 4.2% YoY in May, compared to 3.8% in April. This figure came in line with the market expectation.
On a monthly basis, the CPI increased by 0.5%, matching the forecast. Finally, the core CPI, which excludes volatile food and energy prices, rose 0.2% and 2.9% on a monthly and yearly basis, respectively. Following the hot inflation report, market expectations have aggressively pivoted away from any remaining hope for rate cuts this year, supporting the Greenback.
The potential upside for the pair might be limited amid fears of currency intervention from Japanese authorities. Finance Minister Satsuki Katayama stated on Tuesday that the government is keeping a close watch on currency market movements. She emphasized that Japan’s stance remains unchanged regarding its preparedness to implement decisive steps when needed to ensure market stability.
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.