Japanese Yen inches higher despite BoJ policy uncertainty

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USD/JPY edges lower after posting modest gains in the previous session, trading around 157.40 during the Asian hours on Friday.

Japanese Yen may struggle amid Japan’s economic challenges, as the Iran war heightens external risks.
BoJ’s Kazuo Ueda warned the Middle East conflict may hurt Japan’s economy; Ryozo Himino signaled policy adjustments amid volatility.
US Dollar strengthens as Fed officials consider further rate hikes if inflation stays above target.

USD/JPY edges lower after posting modest gains in the previous session, trading around 157.40 during the Asian hours on Friday. However, the pair’s downside may remain limited as the Japanese Yen (JPY) faces pressure from Japan’s ongoing economic challenges, including subdued growth and elevated inflation driven by external risks. These conditions are prompting traders to reassess expectations for the Bank of Japan’s (BoJ) rate policy.

BoJ Governor Kazuo Ueda warned that the Middle East conflict could materially affect Japan’s economy, signaling that the central bank may keep interest rates on hold for an extended period. Meanwhile, BoJ board member Ryozo Himino said the central bank would still make necessary policy adjustments amid market volatility, indicating that rates could move toward neutral if underlying inflation accelerates toward the BoJ’s target.

The USD/JPY pair may find support as the US Dollar (USD) strengthens, with Federal Reserve (Fed) officials continuing to consider the possibility of further rate hikes if inflation remains above target, despite calls from some policymakers who argue that the time to begin rate cuts has arrived.

Market participants are also awaiting Friday’s Nonfarm Payrolls (NFP) report, where consensus expectations are around 59K for February, following January’s above-trend reading of 130K. A weaker-than-expected print could revive expectations for Fed rate cuts and weigh on the Greenback.

The US Dollar is also drawing support from rising geopolitical tensions in the Middle East. Iran launched a new wave of missile and drone strikes across the Gulf on Thursday, with attacks reported in the United Arab Emirates, Bahrain, Qatar, and Kuwait.

Iranian Foreign Minister Abbas Araghchi said Tehran has not sought a ceasefire and has no intention of negotiating, while Iran’s Islamic Revolutionary Guard Corps warned that retaliatory strikes would intensify in the coming days.

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.