Yen slides after Japan posts first current account deficit in 17 months

The Japanese yen came under broad selling pressure on Monday after data revealed Japan's current account swung into its first deficit in 17 months, lifting the British pound to a one-week high against the yen and pushing the Australian dollar sharply higher in the GBP/JPY and AUD/JPY crosses.

Japan's Ministry of Finance reported a current account deficit of ¥92.3 billion ($584.5 million) in June, a stark miss against economists' median forecast for a ¥1.51 trillion surplus. The ministry attributed the swing to surging oil import costs and a 74% drop in net primary income from securities, driven by larger dividend payouts from Japanese companies to foreign investors.fxstreet+1

Structural Headwinds Compound Yen Weakness

Japan's longer-term fiscal outlook amplified the selling. With public debt exceeding 200% of GDP and Prime Minister Sanae Takaichi's expansionary policies and proposed tax cuts fueling concerns about debt sustainability, the yen found few buyers. The AUD/JPY pair rose 0.70% on Monday to trade around 112.25, according to FXStreet, while GBP/JPY recovered ground after closing near 212.91 the previous week.currencynews+1

Analysts at BNY noted that "long-end JGB pressure is building," with "inflation risks and fiscal concerns" pushing long-dated yields "toward the upper end of recent ranges". Markets are now pricing roughly a 50% chance of a 25-basis-point Bank of Japan hike in September and a full hike by year-end.fxstreet

Rate Divergence Keeps Carry Trades Alive

The widening interest rate gap between Japan and other major economies continued to attract yield-seeking capital. While the Bank of Japan maintains rates well below its peers, the Bank of England has pursued a more hawkish path, and Australia's Reserve Bank holds its benchmark rate at 4.35%.tradingeconomics

The RBA is widely expected to keep rates unchanged at its decision on Tuesday, August 11. All 31 economists surveyed by Bloomberg anticipate no change, according to Rabobank, which noted the central bank "seems to hope" its three hikes this year are sufficient to mop up excess demand. NAB Economics said its next expected move in Australian rates is down, though the timing remains uncertain.nab+1

For the yen, the outlook hinges on whether Japanese authorities will intervene again. ING expects the USD/JPY pair to remain broadly contained between 155 and 160 following recent coordinated US-Japan action, but warned: "We struggle to see this bilateral action driving USD/JPY sustainably below 155".currencynews