Japanese Yen underperforms on surprising current account deficit
- The Japanese Yen faces selling pressure against its major currency peers as Japan’s current account unexpectedly turns into a deficit.
- Japan’s Current Account deficit arrives at JPY 92.3 billion in June vs. +JPY 1,512 billion expected.
- Traders have scaled back hawkish Fed bets after weak US NFP data.
The Japanese Yen (JPY) is down against its major currency peers on Monday, trading 0.6% lower at around 158.80 against the US Dollar (USD) at the time of writing during the European trading session. The Japanese currency faces selling pressure as the nation's current account surprisingly turns to a deficit in June.
Earlier in the day, Japan’s Ministry of Finance (MoF) reported that the net flow from goods, services, and interest payments into and out of Japan was in deficit at JPY 92.3 billion, while the data was expected to remain in surplus at JPY 1,512 billion. In May, the current account surplus was at JPY 3,968.3 billion.
The MoF reported that higher crude Oil prices and significant dividend payouts to foreign investors led to a significant jump in total outflows.
On the monetary policy front, the Summary of Opinions (SoP) of the July policy meeting released earlier in the day showed that the majority of officials continue to support a tightening bias. One member also favored to quicken the tightening process than markets currently expect amid rising upside risks to prices.
On the US Dollar front, investors await the United States (US) Consumer Price Index (CPI) data for July, which will be released on Wednesday, to get fresh cues regarding the Federal Reserve’s (Fed) monetary policy meeting.
After the release of the weak US NFP report for June on Friday, financial markets have trimmed hawkish Fed interest rate expectations.
Fed repricing gathers pace as weak employment data underpins US Dollar bearishness
Strategists at ING highlight that the first of their five tests for a more dovish Fed stance “arrived on Friday and came through clearly dovish and dollar-negative.” They point out that, as ING economist James Knightley notes, “the -20k payroll print was not the only concern,” with “more than 100k of downward revisions” leaving “average payroll growth at just 20k over the past three months, with health and social care still doing most of the heavy lifting.”
Against this backdrop, ING says “our dovish Fed call is strengthening, and so is our bearish bias on the dollar.” The bank underscores that, even after Friday’s move, “11bp are still priced in for September, 28bp for December and 40bp for April,” arguing that “there remains ample room for dovish repricing to harm the dollar if we are right about the Fed.”
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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