Japanese Yen edges higher above 156.50 as Middle East conflict fuels safe-haven demand

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The USD/JPY pair trades in negative territory near 156.85 during the Asian trading hours on Thursday. Escalating conflict in the Middle East leads to a safe-haven bid for the Japanese Yen (JPY) against the US Dollar (USD).

USD/JPY drifts lower to around 156.85 in Thursday’s Asian session.
Israel began a new 'wave of strikes' in Iran, raising fears of a prolonged war.
The US ISM Services PMI hit its highest level since July 2022.

Israel's military said it has begun a new "wave of strikes" targeting military infrastructure in Tehran. Earlier, the chairman of the Joint Chiefs of Staff said the US will start “striking progressively deeper” into Iran. Fears of a prolonged conflict in the Middle East could boost a safe-haven asset such as the yellow metal.

Bank of Japan (BoJ) Governor Kazuo Ueda said on Wednesday that he will closely watch the impact of Middle East developments on the domestic and overseas economy. Meanwhile, Finance Minister Satsuki Katayama said that she is watching market developments closely and prepared to take various measures if needed.

Economic activity in the US service sector gathered momentum in February, which could lift the Greenback against the JPY. The US ISM Services PMI rose to 56.1 in February, versus 53.8 prior. This figure came in better than the estimations of 53.5.

(This story was corrected on March 5 at 06:20 GMT as Japan's Finance Minister Satsuki Katayama was misgendered.)

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.