What is causing the Japanese yen to be close to its three-month low against the dollar?

• The Japanese yen is close to its three-month low against the U.S. dollar, having reached 153.18 on Wednesday.
• The Japanese currency is being pressured by the upcoming elections in Japan, strong growth indicators in the U.S., and a still high rate differential between the U.S. and Japan, according to analysts who spoke to CNBC.

The Japanese yen is close to its three-month low against the U.S. dollar, having reached 153.18 on Wednesday.

Historically, the Japanese currency's weakness has been linked to the disparity between U.S. and Japanese interest rates, with lower rates exerting downward pressure and higher rates lifting it up. For nearly eight years, Japan maintained negative rates, which kept its currency undervalued relative to the dollar.

Despite the Federal Reserve lowering rates and the Bank of Japan raising them, the yen is still depreciating.

RBC Capital Markets' Asia FX strategy head Alvin Tan stated that the yen is the G10 currency with the lowest yield.

Holding a long yen position is expensive because it provides a lower interest rate compared to other currencies, such as the euro or the U.S. dollar.

"Despite the Fed (or ECB) cutting rates, the annualized 1-month deposit rate for yen is only +0.03%, while it is 4.76% for the U.S. dollar. This rate differential is too large for many investors to consider holding the yen for a long period, which is why it cannot strengthen consistently."

According to Homin Lee, senior macro strategist at Swiss private bank Lombard Odier, the recent volatility in yen can be attributed to the market repricing the return of former U.S. president Donald Trump to the Oval Office, strong growth indicators in the U.S., and concerns about the upcoming election in Japan.

He states that it may not be possible to avoid continued volatile trading in the currency pair due to upcoming elections in the U.S. and Japan.

Japanese authorities could intervene again if the yen's weakness continues, Lee stated, emphasizing that voters remain dissatisfied with the "extreme cheapness of the currency."

According to RBC's Tan, for the yen to strengthen, global risk sentiment must weaken significantly. He explains that the yen is the top safe haven currency and benefits when global market volatility increases.

During periods of risk-off sentiment, the yen tends to weaken against the greenback when U.S. yields rise while equities fall, as Hugh Chung, chief investment advisory officer at wealth and fund platform Endowus stated in an interview with CNBC earlier this year.

On Wednesday, the currency experienced a more than 1% depreciation, coinciding with the rise in U.S. yields and the decline in stocks over the past few days.

The yen was last trading at 152.82 against the dollar.