Stronger US Dollar and safe-haven outflows weigh on Japanese Yen

25-bps hike draws two dissenting votes as the Fed holds rates steady; USD/JPY rebounds.
Market sentiment draws support from robust AI earnings and Fed Chair Warsh's resolute stance on inflation.
Rising bond yields and outflows from safe havens pressure the Japanese Yen ahead of BoJ policy decisions.

USD/JPY trades near 158.00. The pair is recouping the previous day's losses during Thursday's Asian session as the US Dollar (USD) rebounds from its own decline a day earlier. The Federal Reserve (Fed) recently left interest rates on hold, although two policymakers dissented in favour of a 25-basis-point rise.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Speaking after the decision, Fed Chair Kevin Warsh stressed the economy's continued strength and reiterated the Federal Open Market Committee's commitment to price stability and its 2% inflation target. He also set out the future monetary policy timetable. The Fed will convene eight meetings next year, one of which will not include a vote, while he expects six policy-setting meetings in 2028.

Outflows from safe-haven assets are adding to pressure on the Japanese Yen (JPY). Government bonds have declined as sentiment towards artificial intelligence improves, driving the shift. South Korean chipmaker SK Hynix reinforced the upbeat AI outlook with robust third-quarter results and plans for higher shareholder returns, supported by AI-driven profits.

Attention now turns to Friday's Bank of Japan policy meeting. Although markets widely expect rates to stay on hold, persistent inflationary pressures may prompt officials to signal a possible increase in December.

The Japanese Yen's performance against its G10 peers has improved, according to Rabobank strategists. They note that “the JPY is the second best performing G10 currency in the half year to date after the NOK” and “the fourth best performing G10 currency in the year to date.” However, they warn that “significant amounts of FX intervention in favour of the JPY have been a notable factor in supporting it this year,” highlighting how much official intervention has underpinned the currency's recent resilience.

Japanese Yen: Key Questions

Key Drivers of the Japanese Yen

Among the world's most actively traded currencies, the Japanese Yen (JPY) broadly reflects Japan's economic performance. More specific influences include Bank of Japan policy, the gap between Japanese and US bond yields, and traders' appetite for risk, alongside other factors.

Bank of Japan Policy and the Yen

Currency control is one of the Bank of Japan's mandates, making its actions a major influence on the Yen. At times, the BoJ has intervened directly in foreign exchange markets, usually to weaken the currency. Political concerns among Japan's main trading partners, however, discourage frequent intervention. Between 2013 and 2024, the BoJ's ultra-loose monetary policy weakened the Yen against its major peers as the policy gap with other leading central banks widened. More recently, the gradual withdrawal of that exceptionally loose stance has provided some support for the Yen.

US–Japan Bond Yield Gap and the Yen

By maintaining ultra-loose monetary policy over the past decade, the BoJ increasingly diverged from other central banks, especially the US Federal Reserve. The resulting widening of the yield gap between 10-year US and Japanese bonds supported the US Dollar against the Japanese Yen. That gap is now narrowing following the BoJ's 2024 decision to gradually withdraw its ultra-loose policy and interest-rate reductions by other major central banks.

Risk Sentiment and Demand for the Yen

Often regarded as a safe-haven investment, the Japanese Yen tends to attract investors during periods of market stress because of its perceived reliability and stability. Such turbulence is therefore likely to lift the Yen against currencies considered riskier investments.