Falling real wages is not good news

The Japanese Yen (JPY) is one of the most traded currencies in the world. Its value is largely determined by the performance of the Japanese economy, but more specifically by Bank of Japan policy, the difference between Japanese and US bond yields, or risk sentiment among traders, among other factors.

One of the Bank of Japan’s mandates is currency control, so its moves are key for the yen. The BoJ has intervened directly in currency markets on occasion, generally to depress the yen, although it refrains from doing so because of the political concerns of its main trading partners. The BoJ’s ultra-loose monetary policy between 2013 and 2024 caused the yen to depreciate against its major peers due to a growing policy divergence between the Bank of Japan and other major central banks. More recently, the gradual unwinding of this ultra-tight policy has provided some support to the yen.

Over the past decade, the BoJ’s stance of sticking to an ultra-loose monetary policy has led to increased policy divergence with other central banks, particularly the US Federal Reserve. This supported a widening of the spread between US and Japanese 10-year bonds, which favored the US dollar against the Japanese yen. The BoJ’s decision in 2024 to phase out ultra-loose policy, coupled with interest rate cuts at other major central banks, narrows this gap.

The Japanese yen is often seen as a safe investment. This means that during periods of market stress, investors are more likely to put their money into the Japanese currency due to its supposed reliability and stability. The troubled times are likely to strengthen the value of the yen against other currencies considered riskier to invest in.