Japanese Yen gains ground as oil prices decline

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USD/JPY falls as a potential reopening of the Strait of Hormuz lowers oil prices.
Traders watch for Japanese currency intervention if the JPY drops toward the critical 160-per-dollar level.
The US Dollar declines as safe-haven demand fades on potential US-Iran peace agreement.

USD/JPY gains ground after opening at a bearish gap, remaining in the negative territory and trading around 158.90 during the Asian hours on Monday. The pair maintains its downward momentum as the Japanese Yen (JPY) gains support from falling oil prices. This shift comes amid growing signs that the United States (US) and Iran are moving closer to a diplomatic agreement, which could ultimately lead to the reopening of the strategic Strait of Hormuz.

Meanwhile, recent economic data complicates the outlook for Japan's monetary policy. Reports released last week indicated that Japan’s core inflation rate slowed to a four-year low of 1.4% YoY in April, easing the immediate pressure on the Bank of Japan (BoJ) to tighten its policy.

However, the BoJ may still consider hiking interest rates in the future because the domestic economy continues to display overall resilience. Meanwhile, market participants remain highly alert to potential currency intervention by Japanese authorities, in case the JPY falls again toward the critical 160-per-dollar threshold that previously triggered Tokyo's market interventions in late April and early May.

The USD/JPY pair is experiencing additional downward pressure due to a weakening US Dollar (USD), which has lost ground as safe-haven demand diminishes in anticipation of the United States (US)-Iran accord. Current reports suggest that the two nations are nearing an agreement centered on a 60-day ceasefire extension. As part of this proposed deal, the Strait of Hormuz would reopen, Iran would clear the mines it deployed in the waterway and permit free shipping passage, and the United States would respond by lifting its current blockade on Iranian ports.

However, the decline of the Greenback may be limited by persistent inflationary pressures in the United States, which have caused investors to recalibrate their Federal Reserve expectations away from rate cuts and toward potential future rate hikes. According to the CME FedWatch tool, market participants are now pricing in a 41.0% probability that the Fed will implement a 25-basis-point interest rate increase by the end of the year.

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.