Kato of Japan: It is significant that Japan and the U.S. reaffirm key points on currency policies

Japan's Finance Minister, Katsunobu Kato, stated this Friday that the joint statement was relevant in light of the new tariff order from the United States. He also added that there had been no discussions with U.S. Treasury Secretary Bessent about specific exchange rate levels (FX).

Highlighted Statements

Kato mentioned that detailed discussions were held with U.S. Treasury Secretary Bessent regarding the exchange rate issue. He emphasized the importance of Japan and the United States reaffirming fundamental aspects of their currency policies.

The Japanese official explained that the decision to issue a joint statement on exchange rates was made following the executive order from the U.S. regarding tariffs on Japan. He also clarified that desirable levels of the exchange rate were not discussed with Bessent.

Market Reaction

At the time of writing this report, the USD/JPY pair recorded an increase of 0.05% during the day, trading at 147.30.

Frequently Asked Questions about the Japanese Yen

What key factors influence the Japanese yen?

The Japanese yen (JPY) is among the most traded currencies globally. Its value is largely determined by Japan's economic performance, but more specifically by the Bank of Japan's policy, the differential between Japanese and U.S. bond yields, and the risk sentiment among traders, among other elements.

How do the decisions of the Bank of Japan affect the yen?

One of the mandates of the Bank of Japan is monetary control, so its movements are crucial for the yen. The BoJ has directly intervened in the foreign exchange markets on occasion, generally to depreciate the yen, although it refrains from doing so frequently due to political concerns from its major trading partners. The BoJ's ultra-flexible monetary policy between 2013 and 2024 caused the yen to depreciate against its major currency pairs due to an increasing policy divergence between the Bank of Japan and other major central banks. More recently, the gradual dismantling of this ultra-flexible policy has provided some support to the yen.

How does the differential between Japanese and U.S. bond yields impact the yen?

During the last decade, the BoJ's stance of maintaining an ultra-flexible monetary policy has led to a growing divergence of policies with other central banks, particularly with the U.S. Federal Reserve. This supported an expansion of the differential between the 10-year bonds of the U.S. and Japan, which favored the U.S. dollar against the Japanese yen. The BoJ's decision in 2024 to gradually abandon the ultra-flexible policy, along with interest rate cuts from other major central banks, is reducing this differential.

How does the general risk sentiment affect the Japanese yen?

The Japanese yen is often considered a safe-haven investment. This means that during times of market tension, investors tend to put their money into the Japanese currency due to its supposed reliability and stability. Turbulent periods usually strengthen the value of the yen against other currencies perceived as riskier to invest in.