Japan's currency has depreciated significantly, reaching a point on Monday where 160 yen equaled $1. Just a few years ago, the exchange rate was closer to 100 yen per U.S. dollar. This weakness has brought the yen back to levels last seen in 1990, following the collapse of Japan's renowned “bubble economy.”

Japan's May core inflation data came in slightly cooler than expected at 2.5%, while the "core-core" measure declined to 2.1%. This prompted the yen to weaken further. Japan's Nikkei rose 0.1% and the yen eased another 0.1% to trade at 159.01, its softest since late April when the Japanese authorities intervened in the market to stem the currency's fast declines. Data showed earlier in the day that Japan's demand-led inflation slowed in May, complicating the outlook for interest rate hikes.

The BoJ’s attitude towards Yen weakness

Bank of Japan chief Kazuo Ueda suggested that inflation might now be more sensitive to the impact of a weakened yen. He also indicated that the central bank would consider raising interest rates sooner if there are increased risks to the inflation outlook. He also said: “The uncertainty facing Japanese prices remains high, we need to pay attention to the impact of foreign exchange on prices and growth.”

The BOJ guides short-term rates in a range of zero and 0.1 percent, with financial markets still divided over when it would raise them again. The weaker yen has increased import prices for energy and raw materials, in a blow to resource-poor Japan, while boosting exporters whose overseas profits are inflated in yen terms.

The yen has long been under pressure as the Bank of Japan kept interest rates remarkably low to encourage more inflation in its economy. The Bank of Japan and the Ministry of Finance (MoF) weighed into the yen crisis earlier today. BoJ Governor Ueda said the central bank could take monetary action if the yen’s depreciation has a significant effect on prices. Ueda stated his readiness to tighten policy, saying that if inflation was higher than expected, it would be appropriate to adjust interest rates. Ueda’s remarks may be an attempt to provide the yen with a boost by sending a message that further rate hikes are on the table if inflation moves higher. The gradual nature of the yen’s depreciation over the last few weeks makes it far more difficult for the MOF and BOJ to justify intervening again.

Weak yen’s impact on Forex market

A weaker yen makes Japanese exports more competitive in international markets. This can boost demand for Japanese goods and services abroad, potentially increasing export revenues for Japanese companies. Japanese companies that earn significant portions of their revenue from overseas may see increased profits when translating foreign earnings back into yen at a more favorable exchange rate.

Foreign investors may be attracted to Japanese assets when the yen weakens, seeking potential gains from asset appreciation or higher yields due to currency exchange rates. A weak yen could influence the Bank of Japan's monetary policy decisions. It may prompt policymakers to intervene in currency markets or adjust interest rates to stabilize the yen's value or manage economic conditions.

In a weak yen environment, traders frequently favor pairing the yen with stronger currencies. For example, common currency pairs include USD/JPY, EUR/JPY, and GBP/JPY. Investors seek to benefit from potential yen depreciation against these currencies, exploring opportunities for profitable trades based on exchange rate movements.

FAQs about Japanese Yen

1. What are the main factors driving the Japanese Yen?

Factors affecting Japanese Yen include: geopolitical tensions, monetary policy divergence, economic data, liquidity risk, currency interventions, interest rate differential, fluctuations in global financial markets and so on.

2. How can I trade Japanese Yen?

There are 4 common ways that you can speculate on the value of Japanese yen: Forex, Forex CFDs, futures and ETFs.

• Forex: you can buy and sell currencies like Japanese yen against other currencies like the US Dollar, British Pound etc.
• Forex CFDs: you're making a deal with a broker to make a profit or loss from the difference in the opening and closing price of your trade. markets.com, is a professional CFD broker, we offer you a platform to trade CFDs on the yen currency pairs, create your account right now!
• Futures: you can buy or sell Japanese Yen at a future date for a price that you agree on now.
• ETFs: Yen ETFs allow you to gain exposure to the Japanese Yen (JPY) currency market through the purchase of shares in the ETFs, you don’t need to deal directly with the currency market.

3. What affects USD/JPY exchange rate?

Economic trends in Japan, including factors such as GDP growth, inflation levels, and trade balances, as well as corresponding trends in the United States, play a crucial role in influencing the USD/JPY exchange rate. Differences in economic performance between these two countries can lead to fluctuations in the exchange rate.

4. What causes the yen to drop?

The value of a country's currency rises and falls relative to currencies elsewhere in line with the laws of supply and demand. Currently, investors are selling off the yen because of a substantial difference in interest rates between Japan and the United States. In such instances, the market enters a self-fulfilling loop.