Why USD/JPY Matters so Much to US PolicymakersU.S. Dollar Currency IndexTVC:DXYFOREXcomIt's often lost on most non-FX traders but the reality is FX pairs are a unique market. Given that currencies are the base of the financial system, the only real way to value a currency is with another currency. So it's not like Apple or Gold or the S&P 500, where there's a built-in yardstick with which relative performance can be compared. If you ask someone how much the Euro is worth, or how much the British Pound is going for, they then need the follow-up question of 'against what.' Normally, it's assumed that the USD is that yard stick if no other information is given but that then invites another question: What makes up the value of the US Dollar? The Dollar basket often references the DXY contract, which was created in the 70's, long before industrialization came to China and well before the Euro was even an idea. As such, when the Euro did come into inception the Dollar basket merely conglomerated the European allocations of DXY into one large 'Euro' portion and, today, that comprises 57.6% of the Dollar basket's value. The second largest component, however, is the Japanese Yen, and that's 13.6% of the DXY basket. And given just how incredibly weak the Yen has been over the past five years, the value of the USD has been deductively strong by comparison. This chart highlights that well, as DXY is represented by the black line showing an approximate 10% gain as DXY over that period of time. The Euro is down by 4.69% against the USD over that same period of time, while the British Pound is almost flat, down by 0.35%. But the Japanese Yen is down by a whopping 48.9% against the USD over this span of time and this is very much to the chagrin of President Trump, who has alluded to 'currency manipulation' multiple times even against a close trading partner of Japan. For Japan's case, there's the fear of hyperinflation and recent surges in yields present a threat; but on the other hand, a strong Yen threatens exports which could further hinder growth. So, I think rationally Japanese policymakers would prefer a stable Yen rather than super charged strength or any additional significant weakness. Unfortunately, the fundamentals, and demographics, don't really support that view as an aging and declining population in Japan makes for a difficult backdrop for growth to sustain. To date, inflation remains below the Bank of Japan's 2% target, which is why interventions have been necessary of late. But US CPI is a major data point to the matter as reversals in 2022, 2023 and 2024 triggered on the back of below-expected CPI releases. - JS