JPY Strength Reshapes Asia-Pacific FX Dynamics
Japanese Yen (JPY) has been gaining strength and reshaping Asia-Pacific FX dynamics. According to Geoff Yu from BNY, JPY's importance in regional trade-weighted baskets is often overlooked, but it plays a major role as a trading partner and competitor with economies in the region.
A weak JPY was pushing up the real- and nominal effective exchange rates of other currencies, limiting their ability to appreciate. However, with JPY strengthening and the US tolerating dollar weakness, regional currencies now have space to appreciate in nominal terms.
The stronger JPY offsets any gains on the dollar leg, and strong current US inflation prevents excessive dollar weakness in real terms. This has created a structurally constructive environment for JPY as long as current-account support holds.
However, Geoff Yu cautions that a renewed oil shock would reverse gains and force further reserve-asset liquidation across Asia.