Yen's Long-Term Direction Driven by Interest Rate Gap

The Japanese authorities' intervention in the foreign exchange market last July led to a significant short-term reversal of the USD/JPY exchange rate, according to LSEG Data & Analytics. The coordinated action from Japanese and US authorities pulled the yen back towards ¥155 after it weakened beyond ¥163 per dollar. However, this move had little impact on the underlying dynamics driving the currency's longer-term direction.

LSEG Data & Analytics notes that the real question for investors is not whether intervention works in the short term, but whether it can alter the structural forces keeping the yen weak. The evidence suggests those dynamics remain intact.

The yen's trajectory continues to be dictated by the gap between Japanese and US interest rates, with the differential of roughly 275 basis points making the yen an attractive funding currency for carry trades. LSEG Data & Analytics argues that this gap appears increasingly structural rather than cyclical, driven by stronger productivity growth and elevated private investment in the US.

Japanese consumer price inflation has moderated to around 1.5-1.7%, compared with US CPI inflation of roughly 3.5%. This reduces the pressure on the Bank of Japan to tighten aggressively, favouring a gradual normalisation path over rapid convergence with US rates.