Japanese Yen remains stuck near long-term lows weighed by wide Fed-BoJ rate differential

The Japanese Yen (JPY) remains on its back foot against a stronger US Dollar (USD) on Wednesday, with the USD/JPY pair approaching 40-year highs at 161.95 again.  The wide differential between the Bank of Japan's (BoJ) interest rates and those of the world's major central banks is keeping the Japanese Yen under pressure, and offsetting the impact of verbal interventions by Japanese officials.

Japan’s Finance Minister Satsuki Katayama reaffirmed earlier this week Tokyo’s commitment to "respond appropriately to currency ⁠moves at any time," repeating a message conveyed by different Japanese authorities over the last few weeks.

Previously, Katayama held an online meeting with US Treasury Secretary Scott Bessent, which raised speculation about a joint operation to shore up the JPY, yet the positive impact on the Yen has been negligible.

Interest rate differentials are crushing the Yen

The fundamental background, however, is strongly unfavourable for the JPY as the comparatively low BoJ interest rates make the Yen the currency of choice for carry trades. This practice consists of borrowing a low-yielding currency and exchanging it for a higher-yielding one to pocket the differential, and is likely to intensify as the Fed is expected to hike rates at least once this year.

Against this background, Reuters reports that former BoJ policymaker Sayuri Shirai affirmed at the Reuters Global Market Forum that the USD/JPY pair might rally as far as 165.00 if the Fed meets market expectations and finally hikes borrowing costs this year. Shirai foresees interest rate differentials and doubts about Tokyo’s appetite for intervention will keep weighing on the JPY.