The USD/JPY briefly rose to a three-month high of 153.18 on Wednesday and is currently hovering around this level.

Forex analyst Lim Hui Jie wrote that in the past, the weakness of the yen was attributed to the difference in interest rates between the United States and Japan, as lower interest rates often put pressure on the currency, while higher interest rates push up the currency. Japan has implemented negative interest rates for about eight years, causing its currency to weaken relative to the US dollar.

But with the Federal Reserve lowering interest rates and the Bank of Japan raising interest rates, the interest rate spread has narrowed. So why is the Japanese yen depreciating now?

Alvin Tan, Head of Asian Forex Strategy at Royal Bank of Canada, stated that the Japanese yen remains the "lowest yielding G10 currency to date". Therefore, the cost of holding a long position in the Japanese yen is high, as the interest rate it offers is much lower than the corresponding currency in the currency pair (which may be the euro or the US dollar).

He also pointed out, "The annualized interest rate for one month deposits in the Japanese yen is 0.03%, while the US dollar is 4.76%. That's why despite interest rate cuts by the Federal Reserve (or European Central Bank), the yen cannot continue to strengthen. For many investors, the spread against the yen is still too large to consider holding for the long term

Homin Lee, Senior Macro Strategist at Lombard Odier, a Swiss private bank, stated that recent fluctuations in the yen may also be due to market expectations for the US election, robust growth indicators in the US, and concerns about the upcoming Japanese election.

He added that due to the elections in the United States and Japan, the continued volatility of the currency pair's trading may be unavoidable in the short term.

However, he also pointed out that further weakening of the yen could trigger further intervention by Japanese authorities, and pointed out that voters are still dissatisfied with the "extremely cheap yen".

Alvin Tan, Head of Asia Forex Strategy at Royal Bank of Canada, believes that global risk sentiment needs to significantly weaken in order for the yen to strengthen. He said that when global market volatility intensifies, the Japanese yen will benefit because it is a top safe haven currency.

USD/JPY daily chart