Japanese Yen Struggles as US Yield Gap Widens

The Japanese Yen (JPY) continued its decline against the US Dollar (USD) on Monday, as the significant difference in bond yields between the two countries supported the Greenback. At the time of writing, USD/JPY was trading around 158.10, up 0.17% for the day.

The yield on the 10-year US Treasury note held near 5.34%, the highest level since 2002. In contrast, Japan’s 10-year government bond yield stood at 3.10%, its highest in around 30 years. This gap of 224 basis points has been a key factor in the Yen’s weakness.

The US Dollar also gained from broader market weakness in the Euro (EUR), driven by concerns over France’s public finances. Meanwhile, traders largely ignored the latest US business activity data, which showed mixed results. The final S&P Global Services PMI was revised slightly higher to 58.8 in September, while the ISM Services PMI fell to 54.9, just missing expectations.

Market expectations for a Federal Reserve rate hike at the October 27-28 meeting have dropped to 21%, down from 70% a week ago, following softer-than-expected US employment figures. Traders are now awaiting the Federal Open Market Committee (FOMC) meeting minutes for further guidance. On the Japanese side, the country’s high debt burden, low interest rates, and rising oil prices continue to weigh on the Yen. Japanese Prime Minister Sanae Takaichi sought to reassure bond investors, stating that the government would monitor economic conditions and control debt issuance appropriately.

The Bank of Japan (BoJ) is on a tightening path, but the Yen has struggled to benefit as other major central banks maintain restrictive policies. Traders are cautious about building large bearish positions as USD/JPY approaches the 160.00 mark, where Japanese authorities may intervene. Looking ahead, BoJ Governor Kazuo Ueda is scheduled to speak on Tuesday, followed by Japan’s Labour Cash Earnings data on Wednesday.