USDJPY Fundamental Analysis – 1-July-2024

USD/JPY—The Japanese yen recently traded at 161 per dollar, nearly matching the 38-year low of 161.28 last week. This plunge is closely tied to Japan’s latest economic data and policy decisions. We must investigate Japan’s financial performance and policy actions to understand this situation and its potential future impact.

Japan’s GDP Drops Sharply in Q1

In the first quarter of this year, Japan’s economy faced a downward revision in its Gross Domestic Product (GDP) growth rate. Initially, the economy was reported to have contracted by 1.8% annually. However, a second revision showed a more severe contraction of 2.9%. This sharper downturn was mainly due to a significant downward adjustment in public works spending, which weakened more than initially anticipated.

GDP is a critical measure of a country’s economic health, representing the total value of goods and services produced over a specific period. A contraction in GDP indicates a decline in economic activity, which can have broad implications for employment, income levels, and overall economic confidence. The revised GDP data highlights more profound economic challenges, putting additional pressure on the Japanese yen.

Japanese Manufacturers Show Rising Confidence

Despite this bleak GDP report, the manufacturing sector had a glimmer of optimism. Data indicated that confidence among sizeable Japanese manufacturing firms improved to a two-year high in the second quarter. This confidence increase suggests that manufacturers anticipate better economic conditions, potentially driven by improved demand and more stable production environments.

However, domestic economic data doesn’t drive the yen’s decline. Policy decisions also play a crucial role. Last week, the Ministry of Finance appointed Atsushi Mimura as Japan’s top currency diplomat. This appointment came amid growing pressure to defend the weakening yen. The yen’s value against the dollar has been under significant stress, losing 2.3% in June alone, extending its year-to-date decline to about 14%.

Yen Weakens Amid BoJ’s Moderate Policy

One major factor behind the yen’s depreciation is the Bank of Japan’s (BoJ) stance on monetary policy. Compared to other major central banks that have been aggressively tightening monetary policy to combat inflation, the BoJ has taken a more moderate approach. This divergence in monetary policy stances has made the yen less attractive to investors, who seek higher returns from currencies associated with tighter monetary policies.

Monetary policy refers to the actions undertaken by a country’s central bank to control money supply and interest rates. When a central bank raises interest rates, it typically strengthens the national currency as higher rates offer better returns on investments denominated in that currency. Conversely, a more accommodative policy, such as keeping interest rates low, can weaken the currency.

Key Factors Shaping the Yen’s Future

Looking ahead, several factors will likely influence the yen’s future. First, further revisions to economic data, particularly GDP figures, will be critical. The yen will respond accordingly if the economy shows signs of recovery or further decline. Second, the actions and statements from the BoJ and Ministry of Finance will be closely monitored. Any indications of a shift towards a more aggressive monetary policy stance could bolster the yen.

Additionally, global economic conditions and the policies of other major central banks will continue to play a role. The yen may remain under pressure as long as the BoJ maintains its moderate policy approach compared to other central banks.

Final Words

In conclusion, the Japanese yen’s current weakness is a product of domestic economic challenges and policy decisions. While the manufacturing sector shows signs of resilience, the overall economic contraction and moderate monetary policy have pressured the yen. Investors and policymakers will need to stay vigilant, as the interplay of these factors will shape the yen’s trajectory in the coming months.

About The Author