The Japanese yen (JPY) has been grappling with sustained pressure from the US dollar (USD) and other major global currencies for a while, primarily due to a stark contrast in monetary policies.
Notably, while Japan clings to its ultra-dovish stance amid surging inflation, the US Federal Reserve and global central banks have been consistently raising rates since March 2022.
This monetary divergence has pushed the yen to near multi-decade lows, with the JPY falling to 151.7 on October 31 and approaching the 152 threshold – a level not seen in more than 33 years.
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However, the Japanese currency saw a slight recovery on November 1, with the USD/JPY currently trading around 151.2.
Why has the yen declined again?
The latest downturn in JPY came in the wake of a new policy decision by the Bank of Japan (BOJ).
To be more specific, the country’s central bank opted to loosen its grip over bond yields on Tuesday in a bid to allow the yield on the 10-year government bond to surpass the 1% threshold.
According to the BOJ, the 1% represents a reference point, not a hard cap.
Although higher interest rates would typically act as a catalyst for the yen, foreign exchange (Forex) traders were dumping the yen because of what did not happen. In particular, the BOJ’s decision was not a clear indication of monetary tightening as it did not scrap the yield cap and maintained its key near-term rate target at -0.1%.
Japan’s authorities ‘on standby’ for market intervention
In the wake of the yen’s drop, Japan’s top currency official at the finance ministry issued a warning that authorities were prepared to intervene in the Forex market to prop up the currency if needed.
“We’re on standby. But I can’t say what we’ll do, and when — we’ll make judgments overall, and we’re making judgments in a state of urgency.”
– Masato Kanda, the top currency official at Japan’s finance ministry.
Meanwhile, Tuesday’s data showed that the government did not intervene in the market in October, in contrast to speculations, further boosting the confidence of yen sellers.
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