The Japanese Yen (JPY) stands as one of the globe’s most actively traded currencies. Its valuation is primarily influenced by the health of the Japanese economy, but more specifically by the monetary policy decisions of the bank of Japan, the yield difference between Japanese and U.S. bonds, and prevailing risk sentiment among market participants, among other factors.
A core duty of the Bank of Japan (BoJ) includes currency management, making its policy actions critical for the Yen’s trajectory. The BoJ has,on occasion,directly intervened in currency markets,typically aiming to weaken the Yen. Though, such interventions are infrequent due to potential political repercussions from major trading partners. The BoJ’s exceptionally accommodative monetary policy from 2013 to 2024 contributed to the Yen’s depreciation against major currencies, driven by a widening policy gap between the BoJ and other leading central banks.More recently, the gradual unwinding of this ultra-loose policy has provided some support for the Yen.
Throughout the past decade, the BoJ’s commitment to an ultra-loose monetary policy resulted in a growing divergence with other central banks, notably the U.S. Federal Reserve. This contributed to an expanding differential between the yields on 10-year U.S. and Japanese bonds, which favored the U.S. Dollar over the Japanese Yen. the BoJ’s 2024 decision to progressively move away from its ultra-loose policy, coinciding with interest rate cuts by other major central banks, is leading to a narrowing of this yield differential.
The Japanese Yen is frequently regarded as a safe-haven asset. This perception means that during periods of market instability, investors tend to allocate their capital to the Japanese currency, attributing to it a reputation for reliability and stability. Consequently, times of economic turbulence are likely to see an appreciation in the Yen’s value relative to currencies perceived as higher risk.
