The USD/JPY pair trades in positive territory for the fourth consecutive day around 157.00 during the early European session on Friday. The cautious pace of the Bank of Japan’s (BoJ) monetary tightening weighs on the Japanese Yen (JPY) against the Greenback. Traders will take more cues from the US Nonfarm Payrolls (NFP) report for December, which is due next week.
The BoJ raised its key interest rate to 0.75% from 0.50% in December, its second hike of the year, to help curb inflation. However, the cautious pace of tightening and the lack of a clear timeline for future hikes have disappointed markets, dragging the JPY lower and acting as a tailwind for the pair.
Nonetheless, some intervention from Japanese authorities might help limit the JPY’s losses. Finance Minister Satsuki Katayama emphasized the official is monitoring foreign exchange (FX) movements with a “high sense of urgency” and is prepared to take “appropriate action” against excessive and one-sided moves.
The prospect of a US interest rate cut this year and renewed concerns over the Federal Reserve’s (Fed) independence could exert some selling pressure on the USD. US President Donald Trump said that he expects the next Fed Chairman to keep interest rates low and never “disagree” with him. Traders are pricing in two rate reductions in the year compared to one predicted by a divided 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.
