The Japanese yen rose significantly during European trading on Friday, as it continued to recover from a three-month low against the US dollar. This rebound was the result of continued buying from low levels, as well as the current decline in the yield on ten-year US Treasury bonds.
In the previous session, the yen ended up 0.6% against the dollar, notching its first gain in four days after hitting a low of 153.18 yen. Political factors associated with Japan’s general election also played a role in strengthening the yen’s value, prompting investors to buy the currency from its cheap levels.
The yield on the ten-year US Treasury bond fell by 0.85%, helping to reduce pressure on the US dollar. This decline in yield reflects a corrective movement and profit-taking, as the market began pricing the possibility of cutting US interest rates by about 25 basis points next November.
Market instruments, such as CME Group’s Feed watch, show that the US interest rate cut prospects at 25 basis points have been priced at 96%, contributing to reducing the gap between long-term bond yields in Japan and the US. This contraction makes Japanese yields attractive to investors, reinforcing the yen’s appreciation rate.
Despite the improvement in the Japanese currency in recent days, the yen is still down 1.5% against the US dollar since the beginning of the week, making it close to suffering its fourth consecutive weekly loss. In conclusion, the focus remains on bond market developments and political factors in Japan, which may significantly affect the course of the yen’s exchange rate in the coming period.
The importance of elections in Japan for the yen
Japan’s general elections play a pivotal role in determining the movement of the Japanese yen, as political factors and economic dynamics are intricately intertwined. The elections are an opportunity for investors and economic observers to assess the future directions of monetary and fiscal policy in the country, which directly reflects on the value of the currency.
As the election approaches, political uncertainty arises, as investors question the possibility of policy changes that may affect Japan’s economic performance. In the run-up to elections, the yen often experiences fluctuations in its value, as investors tend to be cautious.
If there are expectations for the success of a particular political party, this can enhance confidence in the stability of economic policy, supporting the appreciation of the yen. Conversely, if there are doubts about political stability or if the election results are uncertain, the yen may fall due to concern about future policy fluctuations.
The elections also affect investors’ expectations regarding Bank of Japan policy. For example, if the new government leans toward tighter monetary policy, it could lead to higher interest rates, boosting the yen’s value. On the flip side, if the government intends to pursue a more stimulus policy, the yen may weaken as a result of expectations of a rate cut.
Moreover, socio-economic factors associated with elections, such as unemployment and economic growth, contribute to investors’ perceptions of the stability of the Japanese economy. If the winning party focuses on economic reforms aimed at boosting growth, it could boost confidence in the currency. If there are pressing economic issues such as inflation or deflation, this may have a negative impact on the yen’s price.
Impact of yen’s appreciation on Japanese economy
The appreciation of the Japanese yen has multiple effects on the Japanese economy.
as the strength of the currency reflects the state of the economy and affects various economic sectors. When the yen rises, the cost of Japanese exports increases, making it less competitive in global markets.
Japan is one of the countries that rely heavily on exports.
so the high price of the yen may reduce the demand for Japanese products abroad, negatively affecting the profits of exporting companies and increasing pressure on the economy.
Moreover, the yen’s appreciation could reduce the revenues of Japanese companies that generate a large part of their revenues from overseas markets. When foreign exchange earnings are translated into yen, the value is lower.
which affects the balance sheets of these companies and makes them less able to invest and expand.
In the case of large companies such as Toyota and Sony, this can affect their production and employment plans.
which in turn is reflected in the unemployment rate and economic growth.
On the other hand, a stronger yen can lower import costs, helping to reduce inflation. When a currency is stronger, imported goods become cheaper, helping to improve consumers’ purchasing power. This can boost domestic consumption, increase demand for local products and services, and help support economic growth.
But it is important to keep in mind that the potential benefits of lower prices on imports may be temporary. If the yen’s appreciation leads to a deterioration in the balance of trade due to weak exports.
it could lead to a trade deficit, which could put pressure on the value of the currency in the long run.
