162.70: Japanese Yen nears 40-year lows against the US Dollar
- USD/JPY rises to 162.70, despite broad US Dollar weakness, and approaches 40-year highs at 162.84.
- Investors' optimism about a ceasefire in Iran has failed to provide support to the Yen.
- The Yen remains weighed down by interest rate divergence between the BoJ and the rest of the major central banks.
The Japanese Yen (JPY) keeps drifting lower on Tuesday, unfazed by the mild US Dollar’s weakness. The USD/JPY pair has reached session highs at 162.70 during the European trading session, less than 15 pips below the 40-year high of 162.84, which is seen as the new line in the sand for Tokyo intervention.
The US Dollar is showing a moderately offered tone on Tuesday as investors cling to optimism amid reports that US and Iranian authorities are reviewing a peace proposal submitted by mediators that might avoid the conflict escalating out of control.
Interest rate divergences are crushing the Yen
The Yen, however, remains on its back foot as the recent rally in Oil prices adds pressure on major central banks to tighten their monetary policies further, increasing the interest rate divergence with the Bank of Japan (BoJ).
BoJ officials have reiterated their commitment to tighten their monetary policy further, but investors are sceptical that interet rates might be raised much higher than 1.25% in the near term, as they would jeopardise the Japanese Government’s efforts to boost economic growth. This leaves the Yen at the mercy of carry traders, whose strategy consists of borrowing low-yielding currencies to exchange them for higher-yielding ones, and pocket the differential, therefore fuelling massive JPY- short positions.
In the Japanese calendar, the main focus this week is on June’s National Consumer Prices Index (CPI) figures, which are expected to show a mild uptick, following soft readings in the previous two months. The Yen would need a positive surprise on inflation to renew pressure on the BoJ to hike rates and keep JPY sellers at bay, at least for some time.
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.
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