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What Stands Beyond the Recent JPY Strength?

on Sep 23, 2020
Updated: Dec 19, 2022

A safe-haven currency until recently, the JPY is one of the top performers of the year against the USD. USDJPY, once the symbol of a sound stock market, has lost its mojo – the direct correlation with the Dow Jones or the S&P 500 disappeared. 

This is both a blessing and a curse. It is a blessing because we can trade the exchange rate without having to consider what the U.S. stock market will do. On the other hand, it becomes difficult to predict the direction.

USDJPY – Fading Trump’s Policies

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The easiest way to interpret the USDJPY and the stock market decoupling is to remember Trump’s election day. Prior to the election, the two markets (i.e., USDJPY and the U.S. stock market) moved hand in hand – when the Dow Jones dropped, the USDJPY followed. Or, when the S&P 500 advanced, the USDJPY followed.

Similar price action existed days after the election. The U.S. stock market rallied massively – and so did the USDJPY. It rose from approximately 100 to 118, in an almost vertical move, just like the stocks did.

And then the JPY pair faded the stock market move. Slowly but surely, in the four years that followed it gave back almost all the gains, coming down to 104 recently.

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Monetary Policy Differences Disappeared

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One explanation for a strong JPY is that monetary policy differences disappeared. Australia has the rates close to zero, and the downtrend started well before the Fed’s late hiking cycle began.

The ECB in Europe has the deposit facility rate below zero for several years no. So does the SNB in Switzerland. Nordic countries in Europe experienced negative rates too.

Suddenly, Japan was not the only country with zero interest rates. Moreover, QE (i.e., Quantitative Easing) is the norm in all developed worlds. As such, the JPY regained its flexibility, better-reflecting its role among the fiat currencies.

Shinzo Abe’s Resignation Strengthened the Yen

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The longest-serving Japanese prime minister, Shinzo Abe, announced its resignation. The new cabinet, led by Suga, is viewed as the third-most-popular in the country’s history.

It led to a JPY strong move because the implications are that Abenomics are not favored by the population anymore. Or, at the core of Abenomics was sitting a weaker JPY.

The interesting story told by the JPY reflects how monetary policies around the world change the way a currency performs. Coupled with political changes, the currency has an easier time decoupling from old correlations.


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