Why is the Japanese yen currency getting weaker?

Key points

• USD/JPY up more than 300 pips in June
• Yen nears weakest price since 1990
• Japan: Most dovish central bank?
• Japan: Weakest major economy?
• Japan: Expanding balance sheet?
• Traders short USD/JPY on potential mean reversion

USD/JPY up more than 300 pips in June

The Japanese yen has shown a notably bearish trend, resulting in a significant appreciation of the USD/JPY pair, climbing over 300 pips this month alone. This price action is not all that surprising given USD/JPY is now up over 12% year-to-date. However, given historical price action, it is surprising the yen has been so comfortable at such extreme levels with no indication of mean reversion in recent months.

Yen nears weakest price since 1990

USD/JPY is trading close 160.00, marking the pair's highest level in 30 years. This historic rise points to substantial weakening of the Japanese yen against the US dollar, which has not regained strength despite multiple suspected interventions by the Bank of Japan.

Japan: Most dovish central bank?

The Bank of Japan is recognized for sustaining the most accommodative monetary policy among major central banks throughout the 21st century. Most significantly, Japan has not experienced interest rates above 2% since the early 1990's. This prolonged dovish stance is designed to stimulate economic growth but has had significant implications for the value of the yen. By keeping interest rates low, there is little to no yield for investors holding yen. Conversely, investors holding US dollars are currently getting yields north of 5%, as a result of the Fed's rate hikes.

Japan: Weakest major economy?

Despite being a global economic leader, Japan has struggled to achieve high GDP growth consistently since the 1980s. This prolonged economic stagnation challenges its status among the world’s major economies and creates a difficult scenario for the Japanese yen. Since currencies are traded between one another, the impact of this lack of growth is magnified by growth in other regions like the US—driving relative strength to the dollar in favor of the yen.

Japan: Expanding balance sheet?

Another factor that is holding back the yen is the BoJ's inflated balance sheet. While other central banks begin to contract their balance sheets from pandemic-related highs, the Bank of Japan continues to expand its own. This expansion is part of an ongoing effort to inject liquidity into the Japanese economy but also affects the currency's strength.

Traders short USD/JPY on potential mean reversion

A significant 83% of IG Group clients (including tastyfx) with positions in USD/JPY are betting on the US dollar weakening and the yen strengthening. This trend reflects a widespread anticipation of a potential mean reversion after the recent sharp movements in the pair near historic extremes. It is important to remember that although prices have historically reverted towards long-term averages, it could continue through highs as well.

How to trade USD/JPY

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open, monitor, and close positions on USD/JPY

Trading forex requires an account with a forex provider like tastyfx. USD/JPY can be found in tastyfx's platform under the 'Major' pairs tab. Many traders also watch major forex pairs like GBP/USD and AUD/USD for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.