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The Japanese Yen (JPY) slid to a three-week low against the US dollar (USD) on Tuesday, near 151.00, influenced by solid economic data from the US and trade policy developments. On February 25, the USD/JPY exchange rate stood at approximately 149.09 yen per dollar.
The recent weakness stems from robust U.S. services data and cautious optimism regarding U.S. tariff policies. President Donald Trump’s indications that not all threatened tariffs would be imposed on April 2, with some countries potentially receiving exemptions, contributed to this sentiment.
Since the Federal Reserve holds interest rates steady for now, the appreciation seen at the end of February should have come to an end, opines Vincent Chung, Co-Portfolio Manager for the Diversified Income Bond Strategy at T. Rowe Price.
“The Japanese Yen is at an interesting cross-section here,” Chung says. “On the one hand, European growth revisions stemming from a large fiscal package are supporting the EUR and putting pressure on the U.S. Dollar Index. On the other hand, a slowdown in growth in U.S. — due to policy uncertainty — is narrowing the interest rate difference between the U.S. and Japan.”
Chung further notes that the interest rate differential between the U.S. and Japan remains the primary force behind USD/JPY movements. However, he points out that Japanese domestic yields have risen significantly since last summer, leading to tighter financial conditions through both a stronger yen and higher local rates. While the Bank of Japan (BoJ) has not expressed concern about currency fluctuations influencing monetary policy, Chung suggests that this environment could heighten the yen’s sensitivity to external developments, particularly shifts in global growth.
The BoJ held its interest rates at 0.5% at latest meeting in March but signaled further hikes. Strategist from Japanese investment bank Mizuho Securities said the markets are pricing in a rate hike by July, but if the yen depreciates rapidly against major currencies there could be one earlier than that.
The central bank said the biggest concern is the global economy, and in particular the reciprocal U.S. tariffs. BoJ Governor Kazuo Ueda signaled that plans for continued hikes depend on whether the economic and price outlook remains on track.
