The US Dollar appreciates against the Japanese Yen for the second consecutive day on Wednesday, reaching levels right below one-week highs at 156.70 during the European trading session. The wide divergence shown by the minutes of the latest Federal Reserve (Fed) meeting on Tuesday has provided some support to the Dollar in a thin pre-holiday trading session.
Fed policymakers agreed to cut interest rates by 25 basis points at their December 9-10 meeting, although three committee members called for keeping moneary policy unchanged, the highest level of dissenters since 2019.
The minutes of the meeting also revealed that the Federal Open Market Committee leaned towards lowering borrowing costs, prioritising support for a deteriorating labour market despite the ongoing concerns about high inflationary pressures.
Fed inflation concerns remain alive
Looking forward, a majority of the committee members condition further monetary easing to a steady unwind of inflationary pressures. The bank projects one further rate cut in 2026, although markets remain confident that they will be forced to lower interest rates at least twice in the next 12 months.
In Japan, the BoJ’s Summary of Opinions, released earlier this week, reaffirmed the bank’s commitment to higher interest rates, although they were vague about the timing of the next rate hike. The Yen ticked up following the release but has been losing ground gradually as investors weigh the likelihood of a further rate cut in the coming months.
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.
