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Japan’s Finance Minister, Satsuki Katayama, addressed the importance of stable currency movement in line with economic fundamentals. He emphasised the urgency with which the government is monitoring foreign exchange movements.
Following this, the USD/JPY pair dropped by 0.27%, currently hovering around 153.70, with the Yen strengthened by Tokyo’s inflation data and recent currency discussions. The Japanese Yen remains one of the most traded currencies globally, influenced by economic performance and the Bank of Japan’s policies.
Role Of The Bank Of Japan
The Bank of Japan significantly impacts the Yen’s value through its approaches to currency control, often intervening to adjust the Yen’s value while considering international political concerns. From 2013 to 2024, the BoJ’s loose monetary policy led to the Yen depreciating, but recent changes in this policy have offered Yen some support.
A widening policy gap between the BoJ and the US Federal Reserve has historically favoured the US Dollar. However, the BoJ’s recent policy changes and global rate cuts are closing this gap. The Yen is considered a safe-haven asset, attracting investments during volatile market periods due to its perceived reliability.
With officials watching the currency markets with a “high sense of urgency,” we see the risk of direct intervention has significantly increased. The verbal warnings around the 154 level are a clear line in the sand. This suggests that betting on further yen weakness from here is becoming a much riskier proposition for traders.
We must remember the interventions back in late 2022, which occurred when USD/JPY pushed past the 151.90 mark. The current level near 154 suggests the Ministry of Finance’s pain threshold is being tested again. Those past actions show a willingness to spend billions to defend the currency, a fact that should not be ignored.
The Closing Policy Gap
The policy gap between the US and Japan is steadily closing, giving the yen fundamental support. We’ve seen the Bank of Japan deliver two small rate hikes this year, while the latest US Non-Farm Payrolls data showing a gain of only 150,000 jobs has cemented expectations for another Federal Reserve rate cut in December. This narrowing yield differential makes holding yen more attractive.
Domestic factors are also starting to favor a stronger yen. This morning’s Tokyo core inflation figure came in at 2.8%, slightly above market forecasts and keeping pressure on the Bank of Japan to continue its policy normalization. This persistent inflation is a key reason why officials are uncomfortable with a weak currency importing even more price pressures.
Given this backdrop, we should anticipate a sharp increase in USD/JPY volatility in the coming weeks. Traders should consider buying options, such as puts on USD/JPY, to hedge against or profit from a sudden, sharp drop caused by intervention. Selling uncovered calls on the pair is now an extremely high-risk strategy.
