The USD/JPY pair is trading in positive territory for the fourth day in a row around 157.00 during the early European session on Friday. The Bank of Japan’s cautious pace of monetary policy tightening is weighing on the Japanese yen against the US dollar. Traders will benefit from further signals from the US December Non-Farm Payrolls (NFP) report, which is scheduled for release next week.
The Bank of Japan raised its key interest rate to 0.75% from 0.50% in December, the second rise this year, to help curb inflation. However, the cautious pace of tightening and the lack of a clear timeline for future interest rate hikes disappointed the markets, sending the Japanese yen lower and acting as a tailwind for the pair.
However, some intervention by the Japanese authorities may help limit the JPY’s losses. Finance Minister Satsuki Katayama stressed that the official is monitoring foreign exchange movements with a “great sense of urgency” and is ready to take “appropriate action” against excessive and biased moves.
The possibility of a cut in US interest rates this year and renewed concerns about the independence of the Federal Reserve (Fed) could put some selling pressure on the US dollar. US President Donald Trump said he expects the next Fed chief to keep interest rates low and never “disagree” with him. Traders are pricing in two interest rate cuts during the year compared to the cut expected by a divided Fed.
Frequently asked questions about the Japanese Yen
The Japanese Yen (JPY) is one of the most widely traded currencies in the world. Their value is determined broadly by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the spread between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the powers of the Bank of Japan is to control the currency, so its movements are key to the yen. The Bank of Japan has intervened directly in currency markets on occasion, generally to devalue the yen, although it often refrains from doing so due to the political concerns of its major trading partners. The Bank of Japan’s ultra-loose monetary policy between 2013 and 2024 caused the yen to depreciate against its major counterparts due to the growing policy divergence between the Bank of Japan and other major central banks. More recently, the gradual dismantling of this ultra-lenient policy has given the yen some support.
Over the past decade, the Bank of Japan’s ultra-loose monetary policy stance has led to widening policy divergence with other central banks, especially the US Federal Reserve. This supported the widening of the spread between the US and Japanese 10-year bonds, which favored the US dollar against the Japanese yen. The Bank of Japan’s decision in 2024 to gradually abandon ultra-loose policy, along with interest rate cuts at other major central banks, are narrowing this spread.
The Japanese yen is often viewed as a safe investment. This means that in times of market stress, investors are more likely to put their money into the Japanese currency because of its supposed reliability and stability. Turbulent times are likely to strengthen the value of the yen against other currencies that are considered riskier to invest in.
