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Nick Goold

The USDJPY has been making headlines recently, hitting a 34-year high on April 29, 2024, reaching 160.00 before triggering intervention by the Bank of Japan (BOJ) to curb its rise. Understanding the underlying factors driving this strength is vital for all traders looking to take advantage of the high volatility.

Demand for high US interest rates

One of the primary drivers behind the remarkable strength of the USDJPY is the significant interest rate differential between the United States and Japan. While the Federal Reserve plans to reduce interest rates in 2024, higher-than-expected inflation data has prevented them from changing monetary policy. The market now expects interest rates to remain higher for longer, which has seen the long-term US interest rate rise. The chart below shows how the 10-year US interest rate has risen steadily in 2024 back toward 5.00%.

10 year US interest rate chart

10 year US interest rate chart

The Bank of Japan finally ended its negative interest policy this year, but there are few signs of future interest rate rises. At the recent Bank of Japan meeting on April 26, low inflation was highlighted as a reason to avoid raising interest rates, which triggered further buying of the USDJPY. Long-term Japanese interest rates are rising but not at a slower pace than the US, and the 10-year interest rate remains below 1%.

10 year Japan interest rate chart

10 year Japan interest rate chart

This difference in central bank policies has created a favourable environment for the US dollar, with investors flocking to higher-yielding assets. Thus, demand for the US dollar has increased, pushing the USDJPY to new heights.

The chart below shows how the difference between 10-year interest rates in Japan and the US has widened in the past three years, motivating many Japanese to see their currency in return for high-interest returns in the US. While it is difficult to see the spread widening significantly, this difference is sufficient to keep strong demand for US dollars from Japanese investors.

Japan 10 year vs US 10 year interest rate spread chart

Japan 10 year vs US 10 year interest rate spread chart

Inflation Disparities

While the US grapples with persistently high inflation levels, Japan's inflation remains relatively subdued. Recent US data shows that inflationary pressures remain high, making it difficult for the US central bank to raise interest rates. In contrast, inflation data in Japan is still low, so there is little pressure for the Bank of Japan to raise rates from zero.

BOJ Intervention and Market Sentiment

The recent intervention by the Bank of Japan, which injected approximately ¥5 trillion (according to Teppei Ino, Tokyo head of global markets research at MUFG Bank Ltd) into the market to curb the yen's depreciation, shows that the Bank of Japan wants to stop further rises. However, despite these efforts, market sentiment remains sceptical about the ability of such interventions to halt the USDJPY's rise.

With the interest rate differentials heavily favouring the US dollar and fundamental economic factors supporting its strength, many analysts and traders view BOJ interventions as temporary roadblocks rather than sustainable solutions to curtail the USDJPY's surge. The market remains focused on interest rate differentials between the two countries rather than the Bank of Japan's actions in the long term. In the short term, the Bank of Japan has shown it can prevent significant speculative rises, but it will take a narrowing of the interest rate spread, like in late 2023, to start a downtrend.

Outlook and Future Trajectory

Looking ahead, the USDJPY will remain volatile as the Bank of Japan battles with traders to stop the strong uptrend. Short-term traders should focus on following market momentum as there are many strong intra-day trends. Longer-term traders could find profitable buying opportunities to follow the uptrend following future Bank of Japan's interventions and be ready to exit and look for lower should US economic data show signs of weaknesses.