Japanese Yen flatlines on US-Iran deal, BoJ rate hike expectations

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USD/JPY holds steady around 160.20 in Monday's Asian session.
US and Iran said on Sunday they have reached an agreement that will take effect on Friday.
BoJ is set to raise interest rates ‌to a 31-year high on Tuesday.

The USD/JPY pair trades on a flat note near 160.20 during the Asian trading hours on Monday. The US Dollar (USD) softens against the Japanese Yen (JPY) after reports that the United States (US) had agreed to a peace deal with Iran. The Bank of Japan (BoJ) and Federal Reserve (Fed) interest rate decisions will take center stage later this week.

Reuters reported on Sunday that the US and Iran have agreed on a framework for a deal to end their war, halt the US blockade of Iran, and reopen the Strait of Hormuz. Also, the United Kingdom (UK), France, Germany ‌and Italy stated that the countries were prepared to lift sanctions on Iran in response to steps on its nuclear program.

Nonetheless, caution lingered as US President Donald Trump said that if Iran failed to reach a final nuclear accord with the US, he would restart military attacks on Tehran.

"I think we'll see the dollar fall over the course ‌of the next few sessions. We'll probably see some of the risk currencies like Aussie and yen appreciate a little bit. But I don't think we're going to see any huge moves," said Nick Twidale, chief market strategist at ATFX Global in Sydney.

The Fed is likely to keep its key interest rate unchanged at its June policy meeting on Wednesday as it remains in "wait-and-see" mode. Traders will closely watch how new Fed chair Kevin Warsh will lead the US central bank into its next era.

The Bank of Japan (BoJ) is widely expected to raise its benchmark interest rate to the highest level since 1995, undeterred by the absence of its governor. With a hike on Tuesday near fully priced in, markets will closely monitor the timing and pace of future increases. A Reuters poll showed economists projecting the Japanese central bank to raise rates to 1.25% in the fourth quarter (Q4) after a hike in June to 1.0%.

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.