The yen strengthened and gradually moved away from areas suspected of triggering intervention in recent weeks. The trend began to look similar to 2022, when weak US economic data prevented the Japanese government from taking action.
Signs of easing inflationary pressure in the US prompted bets that the Federal Reserve will ease monetary policy during the year. As a result, the US dollar generally weakened against other currencies, and the yen became one of the major currencies with the biggest increase. The yen rose 0.8% on Thursday, although data showed that Japan's economy contracted more than expected in the first quarter.
“The latest rebound in yen has reduced the need for authorities to intervene,” said Koji Fukaya, a Tokyo-based researcher at Market Risk Advisory. He said that although Japanese officials are concerned that a weak yen will drag down consumer confidence and drive up inflation, the biggest driving factor behind the yen's rebound is the US, especially the potential Federal Reserve's interest rate cuts.
The yen fluctuated sharply in recent weeks. In late April, it fell below the $160 mark for the first time since 1990. After that, two rounds of intervention by the authorities were suspected, triggering a brief rise. The yen's rebound shows that even if Japanese officials warn of intervention and central bank officials suggest that interest rates may be raised further this year, ultimately US data and monetary policy are the main factors affecting its trend.
At 13:12 Tokyo time, the yen rose 0.6% to 153.99 yen per dollar. This means that the yen is about 2% higher than the 157.52 level hit before the yen strengthened sharply on May 1. The sharp rise in yen at the time triggered market speculation that Japan might support the exchange rate.
The large gap between the yield of US and Japanese benchmark bonds weighed on the yen, while US bond yields fell after US inflation data was released, helping to narrow the spread. The yen strengthened as US yields declined, which is similar to the trend at the end of 2022. The 10-year US Treasury yield was about 3.4 percentage points higher than the yield on Japanese Treasury bonds on Thursday. The data shows that this is almost the smallest gap in two months.
“Recently, the dominant trend has been the gradual decline of the yen, but given the weakness of the US CPI, a scenario where the Federal Reserve will cut interest rates this year is taking shape,” said Hirofumi Suzuki, chief foreign exchange strategist at Sumitomo Mitsui Bank. “It's getting easier for the yen to strengthen.”