The USDJPY currency pair has been experiencing a downward trend recently, slipping below 153 on Friday morning. This three-week low marks a loss of over 4.5% from its peak of 160.2 at the beginning of the trading week. One of the fundamental factors driving this movement is the significant and widening interest rate differential between the two currencies, coupled with Japan’s shrinking trade surplus. Additionally, currency interventions by the Japanese Ministry of Finance have also contributed to the decline in the pair.
The growth impulses of the yen seem to be diminishing, as evidenced by the recent movements in the USDJPY pair. In October 2022, the pair experienced a substantial drop from a peak of 151.8 to a bottom of 127.3 in just three months, marking a 16.3% decline. However, the pullback in November 2023 was shorter in duration (only one month) and less severe, with a decline of 7.6%. Moreover, there have been instances of sustained declines in USDJPY, such as in July 2023 (around 5%) and March 2024 (around 2.7%), driven by speculation about potential monetary tightening by the Bank of Japan.
The Bank of Japan’s approach to monetary policy has been characterized by a slow and cautious tightening stance. Despite a rate hike in March, the central bank has not implemented further tightening measures, contrary to market expectations. This deliberate pace reflects a broader strategy of modest success in managing the yen’s decline, rather than aiming for significant appreciation. By carefully managing interventions and monetary policy, Japan seeks to enhance the competitiveness of its exports and stimulate domestic demand, albeit at the cost of higher inflation.
As USDJPY continues to decline, there is speculation about its potential trajectory in the coming months. The interest in yen appreciation may diminish as the pair approaches the 50-week moving average. Historical data from 2023 shows that the pair’s movement was influenced by the proximity to this indicator. Looking ahead, there is a possibility of USDJPY declining towards 122, a level that has served as a significant resistance point in the past (in 2007 and 2015). While this outcome is not guaranteed, it underscores the potential for further downside in the currency pair.