Japanese Yen (JPY) exchange rates showed varying strength last month (May 2023), rising against the US dollar (USD) and Pound Sterling (GBP), but falling against the Euro (EUR).
With markets closed for the weekend, the US Dollar to Yen (USD/JPY) exchange rate is quoted at 139.967 as of Sunday, June 4.
The Euro to Japanese Yen exchange rate (EUR/JPY) is quoted at 149.87596 and Pound to Yen rate (GBP/JPY) is currently trading at 174.25192.
The Bank of Japan's (BoJ) monetary stance remained unchanged as they didn't convene, keeping the key policy rate at -0.10% and the 10-year yield at around zero percent due to Yield Curve Control.
Several factors contributed to the Yen's weakening, including reassessments of the Federal Reserve's monetary tightening outlook, which generally boosted the dollar.
The 10-year breakeven rose significantly, hinting at rising inflation expectations in Japan. With inflation hitting new highs and property values also increasing, real yields in Japan are falling.
Despite rising inflation, the BoJ's apparent lack of urgency to change its current monetary stance has also influenced the Yen's movement.
However, there are suggestions that the BoJ might change its Yield Curve Control without much warning.
With possible political factors also in play, the overall view, according to analysts at MUFG, is of limited scope for further rise in the USD/JPY exchange rate, given the Fed's projected pause in June.
Japanese Yen Performance in May
The Yen's performance against other major currencies in May has been mixed, the Japanese currency saw a depreciation against the US dollar but a strengthening against the Euro.
"In May the yen weakened further versus the US dollar in terms of London closing rates from 136.09 to 139.68. However, the yen strengthened versus the euro, from 150.26 to 148.88," says Derek Halpenny, Head of Research, Global Markets EMEA and International Securities at MUFG.
Bank of Japan's Monetary Stance
Despite the fluctuations, there hasn't been a change in the monetary policy of the Bank of Japan (BoJ). The central bank's current stance remained steady with a key policy rate of -0.10% and the ten-year yield managed within a +/- 50bps range due to Yield Curve Control (YCC).
"The BoJ did not meet in May and hence its current monetary stance was unchanged with the key policy rate at -0.10% and YCC restraining the 10-year yield within a range of +/-50bps around zero percent," says Halpenny.
Factors Influencing the JPY's Exchange Rate Performance
Several macroeconomic dynamics influenced the Yen's performance in May. A crucial contributor to these dynamics was a reappraisal of the Federal Reserve's perspective on monetary policy tightening in the US, which resulted in a strengthening of the US dollar.
"Firstly, the reassessment of the outlook for monetary tightening by the Fed helped lift the dollar in general in May and that helped propel USD/JPY higher," Halpenny states. He adds, "From close to a zero probability, OIS pricing now indicates around a 50% probability of another rate hike by the Fed."
Furthermore, the Yen's value was impacted by domestic economic indicators. There's been a significant increase in real yields (the returns on investments that have been adjusted for the effects of inflation) in Japan, accompanied by a surge in inflation expectations.
"Real yields have been falling sharply in Japan with inflation expectations jumping. The 10yr breakeven jumped 20bps in May and reached close to 1.00%, the highest since June 2022," Halpenny notes.
Impact of Asset Price Inflation
The rising inflation in Japan wasn't just limited to goods and services, but also included a surge in asset prices. A broad spectrum of assets, including the Topix Index, property prices, and land prices, experienced significant gains.
The TOPIX, or Tokyo Stock Price Index, is a broad stock market index that tracks all domestic companies listed on the First Section of the Tokyo Stock Exchange (TSE), the largest stock market in Japan. It includes a wide range of company sizes and sectors, making it a comprehensive barometer of the overall Japanese equity market.
"The Topix Index surged 3.6% in May in contrast to a 0.2% gain in the S&P 500. Property prices and land prices are also moving higher in Japan," says Halpenny.
Despite the rising inflation and falling real yields, the BoJ appears untroubled about the situation and is in no hurry to change its monetary policy.
"Adding to yen selling is the clear sense of a lack of urgency from Governor Ueda to change the current monetary stance," says Halpenny.
However, there are signs that the BoJ might spring a surprise and make quick alterations to its YCC policy. "We suspect the BoJ could pivot quickly and alter YCC without much warning," Halpenny states.
In the backdrop of all these factors, the outlook for the Yen seems nuanced. The combination of increasing inflation, changing monetary policy stances, and political factors all paint a picture of restrained potential for further appreciation of the Yen against the US Dollar, especially with a projected pause in the Federal Reserve's policy actions in June.
"With the Fed set to pause in June, we see limited scope for USD/JPY to move higher from here," Halpenny concludes.