Experts agree: Japanese Yen needs more than intervention to take off from lows
- USD/JPY returns above 159.00 on Monday after bouncing from 158.00 lows last week and retracing all losses from Wednesday's sell-off.
- The pair remains close to the key 160.00 level despite broad-based US Dollar weakness.
- Domestic growth and Japanese Government Bonds' sell-off are pointed as significant headwinds for yen recovery.
The Japanese Yen (JPY) extends losses against the US Dollar (USD) in a calm trading session on Monday. The USD/JPY has returned above 159.00 after bouncing from lows near 158.00 last week and approaches the key 160.00 level, which highlights that the mere threat of intervention is not enough to support a significant Yen recovery.
Economic growth seen as key to unlocking a sustainable yen rally
Strategists at Societe Generale argue that the key to a more durable recovery in the Yen lies less in rate differentials and more in the domestic growth story. "I suspect that what is really needed to kick-start a sustainable yen rally, however, is an upgrade to Japanese forecasts, more than anything to do with differentials."
While acknowledging that the "current consensus looks for average growth this year and next of 0.75%, which is better than it was a few months ago," they caution that this remains "still significantly lower than before the Gulf conflict pushed up oil prices," underscoring the need for a more convincing improvement in Japan’s growth outlook before expecting a sustained JPY rebound.
Japan flow dynamics erode support for the Yen
FX Analysts at BNY Mellon put the focus on the growing concerns about Japan's fiscal balance, underscoring that Japan’s latest portfolio flow data show foreign investors stepping up sales of Japanese Government Bonds. “Foreign investors accelerated JGB selling last week, with net outflows of ¥1.25tn, cutting YTD foreign net purchases to ¥4.99tn, the lowest cumulative level since early February,” state the analysts.
The BNY Mellon experts add that, “overall, the flow mix points in the same direction for the currency: foreign selling of Japanese bonds and stronger Japanese buying of foreign assets weaken support for JPY and leave it vulnerable to further depreciation.”
USD/JPY downside momentum fades as range-bound trade persists
In the same line, Strategists at UOB Group retain a mildly negative bias on USD/JPY but discard a significant Yen recovery in the near-term. “Downward momentum is starting to build, but it is insufficient for a sustained decline,” say the UOB Group.
Looking ahead, they judged that in the next one to three weeks, the USD “could edge lower, but any decline should be contained within a 156.60/159.60 range.” The bank's experts recall that it has “mostly traded in a range, and the build-up in momentum is fading,” concluding that they “continue to hold the same view for now” despite the loss of downside traction.
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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