The Japanese Yen (JPY) has hit a rough patch, depreciating for the second consecutive trading day as the US Dollar (USD) gains momentum. This shift comes on the heels of robust US employment data that exceeded market expectations, driving up US Treasury yields and reinforcing the Federal Reserve‘s hawkish stance. Meanwhile, mixed economic signals from Japan, including a smaller-than-expected GDP contraction, offer little resistance to the Yen’s decline. As global economic forces play out, the USD/JPY pair remains a focal point for traders navigating this volatile landscape.
Introduction
The Japanese Yen (JPY) is experiencing a decline for the second consecutive trading day as of Monday. This depreciation is largely attributed to the strengthening of the US Dollar (USD) following the release of better-than-expected US employment data last Friday. Despite mixed economic data from Japan, the Yen’s downward trend continues, influenced by various global economic factors.
US Dollar Strengthens on Robust Employment Data
The USD/JPY pair has found support due to the resurgence of the US Dollar. The recent US employment data has exceeded market expectations, contributing to the Dollar’s strength. The US Dollar Index (DXY), which measures the value of the USD against six major currencies, continues to rise. This increase is supported by higher US Treasury yields and a strong US jobs report, which is anticipated to bolster a hawkish stance from the Federal Reserve.
Impact of US Employment Data
The US Bureau of Labor Statistics (BLS) reported on Friday that Nonfarm Payrolls (NFP) for May increased by 272,000, up from 165,000 in April. Additionally, wage inflation, measured by Average Hourly Earnings, rose 4.1% year-over-year in May, compared to 4.0% (revised from 3.9%) in April. This figure surpassed the market consensus of 3.9%, reinforcing the strength of the US labor market.
Japanese Economic Data: Mixed Signals
On Monday, Japan released mixed economic data that could potentially limit the downside of the Japanese Yen. The Gross Domestic Product (GDP) Annualized figures showed that Japan’s economy contracted less than expected in the first quarter. Specifically, Japan’s GDP Annualized contracted by 1.8% in Q1, slightly better than the anticipated 1.9% decrease and an improvement from the previous 2.0% decline. However, on a quarter-over-quarter basis, Japan’s GDP shrank by 0.5%, in line with the flash data.
Japanese Bond Yields and Monetary Policy
Japan’s 10-year government bond yield has risen above 1.01% ahead of the Bank of Japan’s (BoJ) policy meeting scheduled for Friday. The central bank is expected to maintain its current interest rates. However, traders are closely monitoring the possibility of any reduction in the bank’s monthly bond purchases. Bank of Japan Governor Kazuo Ueda has indicated that while inflation expectations are gradually rising, they have not yet reached the 2% target. Ueda mentioned that the BoJ is scrutinizing market developments and considering reducing bond purchases as part of its exit from massive monetary stimulus.
Federal Reserve’s Potential Rate Cuts
Rabobank has suggested in its report that the Federal Reserve may cut rates in September and December, not necessarily due to progress on inflation but more likely because of a deteriorating economy. The report indicates that the US economy may be entering a stagflationary phase characterized by persistent inflation and an economic slowdown, potentially culminating in a mild recession later this year.
FedWatch Tool Insights
According to the CME FedWatch Tool, the probability of a Fed rate cut of at least 25 basis points in September has decreased to nearly 48.0%, down from 54.8% a week ago. This shift reflects market sentiment in response to the robust US employment data and rising Treasury yields.
Japanese Government’s Stance on Currency Volatility
Japanese Finance Minister Shunichi Suzuki has stated that the government will take action against excessive currency volatility when necessary. He emphasized the importance of maintaining market trust in public finances and mentioned that there is no fund limit for foreign exchange (FX) intervention. This statement underscores the government’s commitment to stabilizing the Yen amid global economic fluctuations.
Foreign Reserves and FX Intervention
The Ministry of Finance reported a significant drop in Japanese Foreign Reserves for May, decreasing to 1,231 billion from 1,279 billion in April. This marks the lowest level since February 2023, attributed to the government’s foreign exchange intervention operations aimed at defending the JPY.
Conclusion
The Japanese Yen’s depreciation against the US Dollar is influenced by a combination of strong US employment data, mixed Japanese economic indicators, and global monetary policy dynamics. While the Yen faces downward pressure, the Japanese government and the Bank of Japan are closely monitoring market conditions and are prepared to take necessary actions to stabilize the currency. As traders and investors navigate these developments, the interplay between US economic strength and Japanese policy measures will continue to shape the USD/JPY exchange rate.
