Japanese Yen gives away gains with markets awaiting clarity on Iran’s war

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The Japanese Yen (JPY) is giving away previous gains against the US Dollar (USD) on Friday, with the USD/JPY pair returning to levels above 160.00, widely considered as the limit of tolerable yen weakness for Japanese authorities.

USD/JPY returns to the 160.30 area after bouncing from the mid-159.00s on Thursday.
The US Dollar is picking up as the initial enthusiasm about a US-Iran peace deal ebbs.
Neither intervention warnings nor BoJ tightening expectations are capable of cutting Yen's bleeding.

Risk appetite ebbed on Friday after the immediate enthusiasm triggered by US President Donald Trump’s announcement of a breakthrough in the US-Iran negotiations, which could lead to a swift reopening of the Strait of Hormuz. Trump initially said that an agreement could be reached as soon as this weekend, although a somewhat colder reaction by Iranian authorities is keeping investors on their toes.

Closer than ever to a peace deal

Iran’s Foreign Ministry spokesperson, Esmail Baghaei, confirmed in a statement to local media that a document is being analysed by Tehran, but he also added that it is “closer to being approved than ever before”, which keeps hopes of a negotiated end to the war alive.

Meanwhile, the pair drifts closer to levels that prompted previous interventions. Japanese Finance Minister Satsuki Katayama reiterated on Tuesday that Tokyo is ready to act decisively against excessive Yen weakness, in the latest of a series of intervention warnings launched over the last few weeks.

Nevertheless, neither these warnings nor the recent hawkish comments from Bank of Japan officials (BoJ) are providing any significant support to the Yen. BoJ Governor Kazuo Ueda was hospitalised this week and is likely to miss next week’s monetary policy meeting, but this does not alter expectations that the bank will hike rates to 1%, its highest level in about 30 years. Investors, however, will be looking for a firmer commitment to further monetary tightening to ease pressure on the Yen.

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.