USD/JPY corrects slightly below 161.00 as Japan’s intervention fears intensify, US NFP eyed

• USD/JPY falls slightly below 161.00 as the US Dollar is under pressure due to firm Fed rate-cut prospects.

• Fears of BoJ’s intervention to support the Japanese Yen have intensified.

• Investors await the US NFP report for fresh guidance on interest rates.

The USD/JPY pair extends its correction to near 161.80 in Friday’s European session. The asset comes under pressure as fears of Japan’s intervention in the FX domain due to one-sided excessive moves, which have led to a sharp weakness in the Japanese Yen and a sheer sell-off in the US Dollar (USD) due to firm speculation that the Federal Reserve (Fed) to begin lowering interest rates from the September meeting.

The Japanese Yen struggles to gain ground even though Bank of Japan (BoJ) policymakers have advocated tightening monetary policy further. The weak Japanese Yen has prompted consumer inflation expectations as Japan’s exports have become competitive globally, and import costs have increased significantly.

However, a sharp contraction in Overall Household Spending in May has cast doubts over BoJ’s rate-hike path. The economic data unexpectedly declined by 1.8%. Economists forecasted that households’ purchasing power would have grown at a slower rate of 0.1% from the prior release of 0.5%.

Meanwhile, the improved probability that the Fed will start reducing interest rates in September has increased investors' risk appetite. S&P 500 futures have posted nominal gains in Asian trading hours.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, has slid further and has posted a fresh three-week low to near 105.00. 10-year US Treasury yields rise to near 4.36% ahead of the United States (US) Nonfarm Payrolls (NFP) data, which will be published at 12:30 GMT.

According to expectations, 190K workers were hired in June, significantly lower than May’s reading of 272K. The Unemployment Rate is estimated to have remained steady at 4%.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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 current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

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 supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.

How does broader risk sentiment impact the Japanese Yen?

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.