Japanese Yen softens on Middle East tensions, Japan signals scope for more intervention

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The USD/JPY pair gains ground to around 157.15 during the early European session on Monday. The US Dollar (USD) edges higher against the Euro (EUR) as ongoing concerns over the Middle East conflict boost safe-haven flows.

USD/JPY drifts higher to near 157.15 in Monday’s early European session.
Trump rejected the new Iran peace offer, calling it “totally unacceptable.”
Japan’s Mimura said continued intervention was possible.

Middle East tensions have risen after US President Donald Trump rejected Iran’s latest peace proposal, a move that pushed oil prices higher and weighed on the Cable. Tasnim news agency said Tehran's proposal included an immediate end to the war on all fronts, a halt to a US naval blockade and guarantees of no further attacks on Iran.

Nonetheless, persistent intervention threats from Japanese authorities might cap the upside for the pair. Japanese officials reportedly intervened in the currency market again during the Golden Week. Markets estimated the cost of these additional moves at approximately ¥4 trillion to ¥5 trillion ($32 billion).

Japan’s top foreign exchange official Atsushi Mimura said last week that continued intervention was possible, adding that International Monetary Fund (IMF) rules don’t limit how often intervention can be conducted.

"Intervention risk and strong official warnings made it unattractive to chase weakness near 160,” said Stefan Rittner, senior portfolio manager at Allianz Global Investors, who is neutral on dollar-yen. Still, "persistent structural headwinds limit the case for a sustained yen rebound despite the cheap valuation and further intervention risk should rise again if dollar-yen approaches prior levels,” Rittner added.

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.

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