The value of the US Dollar rose sharply against the Japanese Yen in 2021. The broad and sustained rally saw the Japanese Yen lose approximately 12% versus the greenback last year. The sell off was significant enough to not only reverse the gains made in 2020, but to push USDJPY to five-year highs. Understanding the cause of the rally is not only important to uncovering the dynamics of USDJPY and its potential future path, it also holds significant insights into wider market sentiment and may hold clues for other currency pairs.
The most obvious and cited argument for the change in value of USDJPY is interest rate differentials. The nominal and, even more so, real rate of interest in Japan is severely negative and amongst the lowest in the world. In contrast, the United States has been treating the task of monetary tightening seriously since at least June last year, unsurprisingly coinciding with USDJPY getting its second wind in the latter half of 2021. Even looking forward, the inflation and interest rate projections suggest that this gap will widen, not shrink, adding to the argument for USDJPY to rally further. The value change can therefore be attributed in no small part to the cost of holding Japanese Yen in comparison with holding US Dollars.
The second reason, which is perhaps more subtle and less quantifiable, is risk. In particular, the market’s digestion of the risk coronavirus presents to the global economy is perhaps best expressed in USDJPY. After all, this pair was the first to react to the pandemic with a 10% jump in the value of the Yen over the US Dollar within 11 trading days as the pandemic began to unfold in February/March 2020. The sustained rally in USDJPY in 2021 alongside medical (including vaccination) advances has mirrored the markets progressive comfort with the pandemic and its diminishing threat to national economies.
2021 has begun constructively with traders seeking to acquire exposure to additional risk over safehaven assets. The discussion surrounding omicron has also moderated and even turned positive as the data on this variant has developed. USDJPY is therefore telling us that markets are less concerned about covid and beginning to price assets according to a post-covid world. Given that many assets and currencies still hold valuations consistent with the financial and economic stress the pandemic has provided, further value adjustments could follow USDJPY.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Daily Brief – A weaker Dollar: Trump vs. Powell
Charles Porter
Thu 26 Jun 2025
A weaker Dollar: Trump vs. Powell The Dollar continued to lose ground yesterday as the truce between Israel and Iran appeared to continue to hold. There has been a noticeable return to focus upon macro and monetary influences in major currency pairs. Yesterday, Fed Chair Jay Powell provided his semi-annual monetary policy report before the […]
Daily Brief – Big Girls Don’t Cry
Charles Porter
Thu 3 Jul 2025
Big Girls Don’t Cry A bond market tantrum and one of the sharpest one day sell offs in Sterling for several years appear to have been catalysed by the Chancellor’s appearance in PMQs yesterday. First: the back story. This Labour government has faced some embarrassment in recent weeks trying to get its welfare bill through […]
Daily Brief – Next level
Charles Porter
Tue 1 Jul 2025
Next level EURUSD has managed a relatively smooth ascent to its current levels, around 1.18. That is despite significant resistance levels, most notably around 1.17. A large collection of option strike prices gathered around this key level and the price history of the pair shows us its significance. Sustained closes above this level since last […]
