Key Takeaways

  • The Japanese currency this week reached new lows not seen in almost a year
  • Contrasting central bank policies may be one of the drivers behind the yen’s downfall

Yen’s Drastic Fall

The Japanese yen has plunged to its lowest value against the US dollar in 11 months as the USD/JPY pair hit ¥149.70 earlier this week. Markets are watching closely, as any further decline beyond 150 yen per dollar could potentially trigger a cash injection by the Japanese government. 

Of course, this would be nothing new, as in October of last year Japan spent $42.8bn to stabilize the Japanese yen when it hit the 150 mark, scoring a 32-year low. Having slightly retreated for only a short period, the USD/JPY has been reflecting a mostly uninterrupted upward trend since mid-July. 

After a two-day meeting last week, the Bank of Japan announced it would not be raising its negative interest rate of -0.1%, strengthening its dovish stance. This decision stands in sharp contrast to the Fed’s policy of keeping its interest rate “higher for longer”, contributing to a stronger dollar. Chief Cabinet Secretary Hirokazu Matsuno spoke last Thursday before the announcement, stating that Japan will be closely monitoring the market and will “respond appropriately without ruling out any options”.

Upcoming US PCE Report

Later today, markets will be eyeing the latest Personal Consumption Expenditures (PCE) report, which is the Federal Reserve’s preferred measure of inflation. Investors expect to see a conservative 0.2% increase in August from a month earlier. In any case, volatility might be expected, giving traders some room for bargain-hunting and dealmaking.

A moderate increase in the PCI index may be considered good for investors as it would show steady economic growth, without too much of a rapid price-advance that would indicate out-of-control inflation, overheating the economy. 

The Fed will be keeping a close eye on the PCE report. Much like the GDP print, the PCE gives the US central bank an insight into how much people are spending on groceries, clothes, and other goods. In turn, this data contributes to shaping key interest rate decisions.

With this in mind, traders should also keep tabs on today’s report and monitor the market closely for any volatility. If the yen falls further, and the Japanese government does decide to step in, in an attempt to prop up the yen, it could impact not only the USD/JPY but the forex market as a whole. As always, it’s important to remain vigilant in the fast-moving market.