Japanese Yen holds steady amid US-Iran tensions

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The USD/JPY pair trades on a flat note near 159.65 during the early Asian session on Monday. The pair steadies as traders continue to assess the developments surrounding the US-Iran conflict.

USD/JPY flat lines around 159.65 in Monday’s early Asian session.
Trump threatens to hit Iran's infrastructure on Tuesday if the Strait remains closed.
BoJ authorities warned that they may adjust policy if Yen weakness persists.

The USD/JPY pair trades on a flat note near 159.65 during the early Asian session on Monday. The pair steadies as traders continue to assess the developments surrounding the US-Iran conflict. The US ISM Services Purchasing Managers Index (PMI) report for March will be in the spotlight later on Monday.

US President Donald Trump on Sunday threatened to destroy Iran’s power plants starting Tuesday and bring “Hell” to the country after US forces rescued an airman from Iran more than a day after his fighter jet was shot down.

Iran rejected Trump’s latest ultimatum to reopen the Strait of Hormuz, adding that the country will reciprocate attacks on its infrastructure and target similar infrastructure owned by the US or related. Uncertainty surrounding the US-Iran ceasefire and persistent tensions in the Middle East could boost the Greenback in the near term.

On the other hand, fears that Japanese authorities would step in to support the domestic currency might support the JPY and act as a headwind for the pair. Japan's top currency diplomat Atsushi Mimura said last week that officials may need to take "decisive" steps if speculative moves persist in the currency market.

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.