Invest: Forex – Why JPY keeps getting cheaper?

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If you have a lot of Japanese Yen (JPY), well, bad news for you. Your JPY is 22% less valuable compared to 1 year ago.

Indeed, Japanese Yen has slipped to more than two-decade lows against the dollar.

Why JPY is getting cheaper?

Good question.

As we all know, the Federal Reserve has been printing US dollars like crazy, however the Bank of Japan (Japan’s Federal Reserve) is NOT printing Japanese Yen that aggressively. This means there is more US dollars flowing in the market, while the amount of Japanese Yen is relatively stable. Given the common sense of scare things are more valuable, this should only mean stronger, not weaker, Japanese Yen.

Well, let’s not forget there is another very important factor in play here – interest rate. Starting this year, the Federal Reserve has announced multiple interest rate hikes for USD, while Japan’s interest rate remains ultra low. This makes dollar-denominated assets more attractive for investors seeking higher returns. The yield on 10-year notes has climbed above 3% – the highest in years – as traders continue to bet on an aggressive series of rate hikes from the Fed.

Simply put, if you have 100 JPY and you put it in a Japanese bank, you don’t get any interest payment (or ultra low interest payment). But if you exchange your 100 JPY to USD, and put the USD in a US bank, you’ll get paid more and even more if the Fed keeps the interest rate hiking. This will cause people to sell their JPY to buy USD. And when a lot of people sell JPY, it gets cheaper.

Other factors include the strength of the US economy and its labor market, while Japan continues to lag behind its peers to bring its economy back to its pre-pandemic size. Japan’s trade balance staying in the red is also likely feeding into this weakening JPY.