• USD/JPY retreats after briefly surpassing 160.00, a level widely seen as a red line for Japanese authorities
• Japanese officials step up warnings over JPY weakness and do not rule out decisive action.
• Middle East geopolitical tensions and Powell’s cautious tone help limit the US Dollar’s downside.

USD/JPY retreats on Monday and trades around 159.60 at the time of writing, down 0.44% on the day, after reaching a nearly 20-month high above 160.00 earlier in the day. The move lower follows renewed warnings from Japanese authorities about potential intervention in the foreign exchange market.

The main catalyst behind the Japanese Yen’s (JPY) rebound came from comments by Japan’s top currency diplomat, Atsushi Mimura, who pointed to increasing speculative activity in currency markets. He warned that Tokyo could take “decisive steps” if these trends persist, reviving concerns about direct intervention to support the Japanese currency.

These remarks come as some policymakers also raise the possibility of a rate hike by the Bank of Japan (BoJ) to curb the inflationary effects of JPY weakness and rising energy prices. According to analysts at MUFG, recent signals suggest that Japanese authorities could respond through both monetary tightening and foreign exchange intervention if pressure on the currency continues.

However, the downside in the US Dollar (USD) remains limited as risk aversion persists amid escalating geopolitical tensions in the Middle East. The involvement of Iran-backed Houthi militias and threats to disrupt key maritime routes for Oil transport have increased market uncertainty and helped sustain demand for safe-haven assets.

In this context, US President Donald Trump said that Washington is holding discussions with what he described as a “new regime” in Iran in an effort to end military operations. At the same time, he warned that the United States (US) could target Iranian energy infrastructure if no agreement is reached quickly or if the Strait of Hormuz remains closed to commercial traffic.

On the monetary policy front, Federal Reserve (Fed) Chair Jerome Powell said earlier that the current policy stance is in a “good place” to wait for more data before adjusting interest rates. The Fed chair also stressed that supply shocks, particularly those linked to energy prices and geopolitical tensions, must be monitored to prevent inflation expectations from becoming unanchored.

Investors will also keep a close eye on upcoming Japanese data releases, including the Tokyo Consumer Price Index (CPI), Industrial Production and Retail Sales figures, which could offer further clues about the country’s economic outlook and the future policy path of the Bank of Japan.