What actually moves the USD/JPY? An important perspective behind the market: "real yields"

What really moves the USD/JPY? The important perspective behind the market: 'real interest rates'

In the FX market, you often hear discussions like "If U.S. rates rise, the dollar strengthens" or "If the rate gap with Japan widens, USD/JPY rises."

Indeed, interest rates are one of the major factors that move exchange rates.

However, in real markets, price movements cannot always be explained by policy rates alone.

So, what are investors looking at?

One of the answers is the concept of **'real interest rate'**.

Real interest rate refers to the nominal rate minus the inflation rate.

For example, if the policy rate is 5% but inflation is 4%, the real rate is about 1%.

On the other hand, if the policy rate is 4% and inflation is 1%, the real rate becomes about 3%.

What matters for investors is not the numerical rate itself, but how much actual value is gained by holding assets.

Therefore, when real interest rates rise, the appeal of dollar assets increases, potentially leading to dollar buying.

Conversely, even with a high nominal rate, if inflation rises further, real rates fall.

As a result, the momentum to buy dollars may weaken.

In the current USD/JPY market, real interest rates remain a key theme.

Market participants analyze not only the Federal Reserve's policy rate but also inflation indicators such as the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE).

In other words, they look at not only "where rates are going" but also "how prices are changing" simultaneously.

That’s why when inflation significantly exceeds market expectations, even with rates held steady, the market can move sharply.

The market is always looking ahead to the future and trying to price in changes in real asset value.

In fundamental analysis, it's important to consider not just a single number like interest rates, but the broader background of prices, the economy, and market participants' expectations.

By looking at the bigger picture rather than at a single data point, your view of the market can change dramatically.

When examining the USD/JPY going forward, please include not only "What is the policy rate?" but also "How is the real rate changing?"

That small difference in perspective can provide a big hint to understanding the essence of the market.

In the currency market today as well, many investors continue buying and selling by not only considering interest rates but also evaluating the 'actual value' that lies beyond them.

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