The USD/JPY Reached Its Highest Level in 38 Years

The Japanese Yen (JPY) fell further today (Tuesday, July 2nd), dropping to a new 38-year low versus the US Dollar (USD), trading around 161.66 as of the time of the writing. This sharp decline has sparked speculation about a possible intervention by Japanese authorities to curb the Yen's weakness.

Let’s take a closer look at the potential reasons behind the USD/JPY rise and what traders should expect:

What's Potentially Causing the Japanese Currency's Fall?

The recent decline of the Japanese Yen can be largely attributed to a tug-of-war between interest rates in Japan and other major economies, particularly the United States. Here's how it plays out:

Divergent Monetary Policy

Unlike many developed nations currently battling inflation with high-interest rates, Japan continues to maintain a very low-interest-rate environment. While the Bank of Japan ended its negative interest rates era in March 2024, rates still hover near 0% in July 2024. In contrast, the Federal Reserve has adopted a more aggressive and hawkish monetary policy in the United States over the last couple of years, pushing interest rates significantly higher (between 5.25% and 5.50% in July 2024).

Investment Flow and Currency Value

This stark difference in key rates between Japan and the United States creates a powerful incentive for traders to hold USD-denominated financial assets. When a currency offers a higher return, it becomes more attractive to hold. In this scenario, the higher US interest rates may make USD-denominated assets more appealing to traders, potentially drawing capital away from the Yen and towards the Dollar. This increased demand for USD could ultimately push the USD/JPY (USDJPY) exchange rate upwards and weaken the Yen.

The Currency Carry Trade Factor

The interest rate differential can also fuel a Forex trading strategy known as the "currency carry trade." In this scenario, traders borrow Yen (the currency with a low interest rate) and use it to invest in USD assets (with a higher return). This essentially allows them to pocket the difference in interest rates. This type of trading further weakens the Yen as more Japanese currency is borrowed and sold, while simultaneously increasing demand for the American currency. 

However, it is important to note that only time will tell what the future actually holds for this Forex pair.

Japan Shuffles Currency Team as Yen Hits New Lows

On Friday, 28 June, Japan announced that Atsushi Mimura, a seasoned professional in the field of financial regulation and the current head of the ministry's international bureau, would be taking over as the country's top diplomat in charge of Foreign Exchange. He will take over Masato Kanda, currently Vice Minister of Finance for International Affairs, Japanese Ministry of Finance, on July 31.

Although it is a consequence of a yearly staff rearrangement, the timing of this leadership transition coincides with increased pressure on the Japanese yen on the Forex market, particularly against the United States Dollar. This is because the weakening of the Japanese Yen is putting pressure on Japanese families and companies mostly on account of rising import prices, known as “imported” inflation.

Will the Japanese Government Intervene?

Japan has a history of intervening in the foreign exchange market to support the Yen and prevent excessive weakening. 

Throughout 2022, they intervened on three separate occasions: June, September, and October totalling a significant 9.2 trillion yen (around $60.78 billion). Most recently, Japan intervened again between April 26 and May 29, 2024, spending 9.7885 trillion yen (approximately $62.25 billion) to bolster the JPY.

Japanese authorities, including Finance Minister Shunichi Suzuki and Chief Cabinet Secretary Yoshimasa Hayashi, have escalated their warnings about the Yen's weakness last week. This comes after the Japanese currency breached the psychologically important level of 160 yen to the dollar, a threshold seen by some traders as a trigger for intervention.

Earlier today, Tuesday, 2nd July, Suzuki expressed deep concern about the rapid depreciation of the Yen, highlighting its potential negative impact on the Japanese economy. The Yen has weakened by over 12% since the start of 2024, raising concerns about rising import costs. (Source: Reuters)

Conclusion

The Yen is hovering near a 38-year low against the Dollar, currently trading around 161.66, surpassing the key 160 level, which has historically prompted intervention by Japanese authorities to support the Yen.

While Finance Minister Shunichi Suzuki reiterated Japan's commitment to address excessive currency volatility, he stopped short of explicitly confirming an imminent intervention. This has left some traders on edge, closely monitoring further developments in the Yen's value and any official announcements from Japan. Only time will reveal what lies ahead for the USD/JPY and the Japanese economy.