USDJPY Fundamental Analysis – 2-July-2024

The Japanese yen has recently depreciated past 161.5 per dollar, marking a new 38-year low. This significant drop in the yen’s value is primarily attributed to the stark interest rate differentials between Japan and the United States.

While the US Federal Reserve has been aggressively hiking interest rates to combat inflation, the Bank of Japan (BOJ) has shown little urgency in normalizing its monetary policies. This divergence in economic policy has put downward pressure on the yen.

Japan’s Low Rates Fuel Yen Drop

The core reason for the yen’s depreciation lies in the differing approaches of the Bank of Japan and the US Federal Reserve towards interest rates. While the US has been increasing its rates to control inflation, Japan has maintained a more relaxed stance, keeping its rates low to support economic growth. This interest rate differential makes the yen less attractive to investors than the dollar, leading to a weaker yen.

Moreover, the Bank of Japan’s reluctance to adjust its monetary policy has further contributed to the yen’s decline. Despite growing speculation that the BOJ might consider hiking rates in its upcoming policy meeting in late July, the lack of urgency has exacerbated the yen’s fall.

Weaker Yen Raises Japan’s Import Costs

A weaker yen has several repercussions for Japan’s economy. Firstly, it increases import costs. Japan relies heavily on imports for energy and raw materials, so a depreciating yen makes these imports more expensive. This rise in import costs can contribute to higher inflation, putting additional financial strain on households and reducing their consumption power.

Furthermore, the higher inflation driven by increased import costs can hurt household consumption. When households spend more on essential goods due to rising prices, they have less disposable income for other expenditures, which can slow down overall economic growth.

Japan Monitors Yen Depreciation Vigilantly

In response to the yen’s depreciation, Japan’s Finance Minister, Shunichi Suzuki, has reiterated the government’s vigilance regarding currency movements. He emphasized that foreign exchange levels are influenced by a complex mix of factors, indicating that the government is closely monitoring the situation but has not yet intervened directly.

On the economic data front, recent revisions have painted a grimmer picture of Japan’s economic performance. The latest data shows that Japan’s economy contracted at an annualized rate of 2.9% in the January-March quarter, a sharper downturn than the previously reported 1.8%. This revision is largely due to weaker public works spending, negatively impacting overall economic activity.

USDJPY Fundamental Analysis – 2-July-2024

The market will be closely watching the Bank of Japan’s policy meeting in late July. If the BOJ decides to hike interest rates, it could support the yen. However, if the BOJ maintains its current stance, the yen could weaken, exacerbating inflationary pressures and further straining household consumption.

Investors should also monitor global economic trends, particularly the actions of the US Federal Reserve. Continued rate hikes in the US could widen the interest rate gap further, putting additional pressure on the yen.

Final Words

In conclusion, the depreciation of the Japanese yen is a multifaceted issue influenced by interest rate differentials, monetary policy stances, and economic data. The current situation poses significant challenges for Japan’s economy, particularly inflation and household consumption.

As the BOJ’s upcoming policy meeting approaches, market participants will keenly observe any shifts in Japan’s monetary policy that could impact the yen and the broader economic landscape.

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