Japan’s Kihara: Market moves will be monitored with a high sense of urgency

Market movements are being closely monitored by Japan’s administration with a heightened sense of urgency, Deputy Chief Cabinet Secretary Minoru Kihara said during Wednesday’s European trading session. On the drivers of these moves, Kihara added, “Markets move on various factors.”

Japanese Yen: Key Questions Answered

Which factors shape the Japanese Yen’s value?

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

Why do Bank of Japan decisions matter for the Japanese Yen?

Currency control forms part of the Bank of Japan’s mandate, making its actions an important influence on the Yen. Direct intervention in currency markets has occasionally been used by the BoJ, usually to weaken the Yen. However, political concerns among Japan’s main trading partners discourage frequent intervention. Between 2013 and 2024, the BoJ’s ultra-loose monetary policy weakened the Yen against its major currency peers as policy at the Bank of Japan increasingly diverged from that of other leading central banks. The gradual withdrawal of this ultra-loose policy has, more recently, provided some support to the Yen.

Why does the gap between Japanese and US bond yields affect the Japanese Yen?

The US Dollar gained support against the Japanese Yen as the yield gap between 10-year US and Japanese bonds widened over the last decade. Behind this widening was the BoJ’s continued commitment to ultra-loose monetary policy, which drove an increasing divergence from other central banks, especially the US Federal Reserve. That yield gap is now narrowing following the BoJ’s 2024 decision to move gradually away from ultra-loose policy, alongside interest-rate cuts by other major central banks.

Why does market risk sentiment influence the Japanese Yen?

During periods of market stress, investors are more likely to move money into the Japanese Yen, which is widely regarded as a safe-haven investment because of its perceived reliability and stability. As a result, market turbulence is likely to lift the Yen against currencies considered riskier investments.

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