Japanese Yen sits near one-week top as Iran de-escalation hopes undermine USD

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The USD/JPY pair recovers slightly from over a one-week low, around the 158.45 region touched during the Asian session on Wednesday, though it lacks follow-through buying.

USD/JPY enters a bearish consolidation phase on Wednesday amid mixed fundamental cues.
Hopes for a de-escalation of the Middle East conflict weigh on the USD and the currency pair.
Economic concerns stemming from the Iran war cap the JPY and offer support to spot prices.

The USD/JPY pair recovers slightly from over a one-week low, around the 158.45 region touched during the Asian session on Wednesday, though it lacks follow-through buying. Spot prices currently trade below the 159.00 mark, nearly unchanged for the day, as traders assess the potential US exit from the Iran war and await fresh geopolitical developments for some meaningful impetus.

President Donald Trump stated on Tuesday that the US would wind down current hostilities with Iran within two to three weeks and that Tehran does not have to make a deal with Washington to end the conflict. The announcement raised hopes for a quick de-escalation of tensions in the Middle East and provided a strong boost to the global risk sentiment, which undermines the US Dollar's (USD) reserve currency status and keeps a lid on the USD/JPY pair.

Meanwhile, the closely watched Bank of Japan's (BoJ) tankan survey showed that business sentiment among large manufacturers improved in the three months to March. The headline index measuring big manufacturers' business confidence rose to 17 during the reported period. This marks the fourth straight quarterly improvement and the highest reading since December 2021. This further supports the Japanese Yen (JPY) and caps gains for the USD/JPY pair.

However, a BoJ official said that the survey likely did not fully incorporate the impact of the Middle East conflict. Adding to this, reports that the UAE is pushing for military action to reopen the Strait of Hormuz raise the risk of broader regional escalation. Given that Japan depends mostly on oil imports from the Middle East, the ongoing Iran war continues to fuel worries that Japan’s economy will come under substantial strain in the foreseeable future.

The outlook, in turn, could weigh on the JPY, though speculations that authorities would step in to support the domestic currency should help limit losses. Nevertheless, the mixed fundamental backdrop warrants some caution before placing directional bets around the USD/JPY pair. Traders now look to key US macro data scheduled at the start of a new month, starting with the ADP report and the ISM Manufacturing PMI, to grab short-term opportunities.

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.