Japanese Yen flat lines vs USD as intervention risks offset soft Tokyo CPI and Fed bets

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The USD/JPY pair struggles to capitalize on a modest intraday uptick, though it manages to hold above the 159.00 mark through the early European session on Friday.

USD/JPY attracts some buyers in reaction to softer Tokyo CPI and a modest USD uptick.
Hawkish Fed expectations and the US-Iran peace deal uncertainty underpin the buck.
BoJ rate hike bets and intervention fears limit JPY losses, capping the upside for the pair.

The USD/JPY pair struggles to capitalize on a modest intraday uptick, though it manages to hold above the 159.00 mark through the early European session on Friday. Spot prices, for now, seem to have stalled the previous day's retracement slide from a four-week top and remain on track to end the week on a flattish note amid mixed cues.

The Japanese Yen (JPY) weakens slightly following the release of softer Tokyo consumer inflation figures, which, along with the emergence of some US Dollar (USD) dip-buying, acts as a tailwind for the USD/JPY pair. Data released by the Statistics Bureau of Japan showed that the Consumer Price Index (CPI) in Tokyo – Japan's national capital – rose 1.4% YoY in May as compared to 1.5% in the previous month. Meanwhile, the core gauge excluding Fresh Food prices decelerated for the sixth consecutive month and climbed by the 1.3% YoY rate during the reported month, down from the 1.5% recorded in April and consensus estimates.

Furthermore, the core CPI, which excludes both Fresh Food and Energy, advanced 1.6% YoY in May vs the previous month's reading of 1.9%. The data is expected to complicate the Bank of Japan's (BoJ) messaging amid growing acceptance for an interest rate hike at the June 15-16 policy meeting. Apart from this, economic concerns stemming from the Middle East crisis and the continued energy supply disruption through the Strait of Hormuz undermine the JPY. The USD, on the other hand, benefits from the uncertainty over a potential US-Iran peace deal. and turns out to be another factor that acts as a tailwind for the USD/JPY pair.

Axios, citing two US officials, reported that the US and Iran have reached a draft agreement to extend the ongoing ceasefire for 60 days. The latest peace proposal still requires final approval from US President Donald Trump. Moreover, investors remain skeptical about a deal to end a three-month-old war amid major US-Iran disagreements over Tehran's nuclear program and the Strait of Hormuz. Adding to this, a potential resumption in open hostilities between the US and Iran caps the optimism. Adding to this, bets that the US Federal Reserve (Fed) will hike rates in 2026 offer additional support to the USD and the USD/JPY pair.

The USD bulls, however, seem hesitant and opt to wait for further developments surrounding the Middle East crisis. Apart from this, speculations that Japanese authorities will step in again to stem further weakness in the domestic currency hold back the JPY bears from placing aggressive bets, and contribute to capping the USD/JPY pair. Moving ahead, there isn't any relevant market-moving economic data due for release from the US on Friday, leaving the USD at the mercy of comments from influential FOMC members. Furthermore, the incoming geopolitical headlines might also produce some short-term trading opportunities.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.