Japanese Yen hangs near one-week low vs USD amid Hormuz risks, BoJ rate hike delay

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The USD/JPY pair oscillates in a narrow band during the Asian session on Wednesday and currently trades around the 159.30 area, just below a one-week high set the previous day.

USD/JPY struggles to capitalize on the previous day’s strong move up to over a one-week high.
An extension of the US-Iran ceasefire undermines the USD and acts as a headwind for the pair.
Economic woes and fading BoJ rate hike bets weigh on the JPY, lending support to spot prices.

The USD/JPY pair oscillates in a narrow band during the Asian session on Wednesday and currently trades around the 159.30 area, just below a one-week high set the previous day. Spot prices, however, remain confined in a familiar range held over the past month or so, warranting caution before placing aggressive directional bets.

The Japanese Yen (JPY) continues with its relative underperformance on the back of economic concerns stemming from the risk to energy supplies due to continued disruptions to shipping through the Strait of Hormuz. In fact, US President Donald Trump reiterated on Tuesday that the US Navy blockade of Iranian ports will continue. In response, Iran's military said that it won't reopen the strategic waterway while the naval blockade persists.

Furthermore, growing acceptance that the Bank of Japan (BoJ) will hold interest rates steady at its upcoming April meeting turns out to be another factor undermining the JPY and supporting the USD/JPY pair. However, Reuters, citing sources, reported on Tuesday that the BoJ is likely to signal its readiness to raise borrowing costs as soon as June in the face of mounting inflationary pressures. Moreover, intervention fears help limit JPY losses.

The US Dollar (USD), on the other hand, is pressured by the optimism that followed Trump's announcement of an indefinite extension of the ceasefire with Iran, hours before it was set to expire. Furthermore, a modest slide in Crude Oil prices eases inflationary concerns, which, along with diminishing odds for a rate hike by the US Federal Reserve (Fed), exerts some pressure on the USD and contributes to keeping a lid on the USD/JPY pair.

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.