The Japanese yen continue to gain ground against most of its major counterparts and the low-yielding currency may appreciate further in the week ahead as market participants scale back their appetite for yields. As the shift in risk-taking takes hold, we are likely to see carry trade interest deteriorate further in the days ahead, and the drop in trader sentiment should continue to prop up the Yen as risk trends continue to dictate price action in the foreign exchange market.

However, as the USD/JPY dips below 80.00 in June, speculation for another currency intervention could resurface over the near-term, and the Bank of Japan may step up its efforts to balance the risks for the region as the economy faces a double-dip recession. The International Monetary Fund encouraged the central bank to expand its balance sheet to strengthen the recovery and said the expansion in monetary policy ‘could guard against deflation risks’ as the fundamental outlook remains clouded with uncertainties. In addition, the group noted that the BoJ should reinforce its commitment to maintain a zero interest rate policy, and went onto say that ‘the yen could weaken and affect other economies via trade and financial channels’ as the IMF sees the board retaining the expansion in monetary policy for some time. Although the BoJ is widely expected to keep the benchmark interest rate at 0.10% next week, Governor Masaaki Shirakawa may announce plans to expand its asset-purchase program in an effort to further stimulate the ailing economy, and the central bank may retain a cautious outlook for the region as it continues to assess the aftermath of natural disasters from earlier this year.

However, currency traders may show little to no reaction to the rate decision as the Japanese Yen remains heavily influenced by risk sentiment, and low-yielding currency may continue to gain ground in the following week as carry interest deteriorates. As the USD/JPY threatens the rebound from May, speculation for another round of currency intervention may resurface should the exchange rate make a run for 79.50, and attempting to catch the bottom on the dollar-yen certainly remains risky at its current level as there appears to be a growing shift in trading behavior.

DailyFX provides forex news on the economic reports and political events that influence the forex market.