The Japanese yen is positioned to be the top-performing currency among the G10 group this week. Following a notable decline at the outset of the week—prompted by Japan’s recent election results—the yen, represented by USD/JPY, has seen a significant turnaround, reaching a low of 152.27 yesterday. This situation illustrates the classic investment behavior of “buy the rumor, sell the fact,” as the yen managed to stabilize even after Prime Minister Takaichi consolidated her position of power in the elections. This has likely prompted many traders to unwind short positions on the yen that had accumulated in previous months.
In a related development, the Japanese government bond (JGB) market has also rebounded, indicating a reduction in market concerns regarding fiscal risks in Japan. Of particular note is the recovery seen in the ultra-long segment of the JGB curve. The 30-year JGB yield has stabilized and is nearing flat for the year, having spiked by nearly 50 basis points on January 20 following Takaichi’s announcement to freeze food tax sales for two years. Despite her commitment to the tax freeze post-election, the anxiety surrounding fiscal risks appears to have diminished among investors.
Atsushi Mimura, Japan’s top currency official, cautioned on recent yen fluctuations, asserting that the authorities remain vigilant despite the yen’s recovery this week. He referenced the U.S. labor market data and subsequent market dynamics, opting to refrain from commenting on potential interventions or rate checks but emphasized Japan’s intent to continue monitoring currency trends closely, indicating an ongoing commitment to mitigate speculative selling of the yen.
Additionally, hawkish remarks from Bank of Japan (BoJ) officials add further support for the yen. Board member Naoki Tamura indicated that there is a possibility of achieving the bank’s 2% inflation target as soon as spring, contingent on sustained wage growth aligning with this goal for three consecutive years. This statement has bolstered market expectations for a potential acceleration in rate hikes from the BoJ, possibly as early as April. Currently, the market is anticipating around 18 basis points in hikes by then, which may help to cushion the effects of Tamura’s comments. As a notable hawk within the BoJ, Tamura has often advocated for a quicker normalization of monetary policy, and it remains to be seen if Governor Ueda and his colleagues share this sentiment. Such increased expectations for rate hikes could serve as a significant driver for the yen’s continued strength in the coming months.
The outlook appears optimistic for the yen as market conditions evolve, with potential catalysts on the horizon that may further support its performance among global currencies.