Japanese Yen softens ahead of US CPI inflation data

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USD/JPY drifts higher to around 157.55 in Tuesday’s early European session.
Trump weighs return to combat as Iran nuclear talks falter.
Japan’s Katayama said the US and Japan affirm close cooperation on currency moves.

The USD/JPY pair gains momentum to near 157.55 during the early European trading hours on Tuesday. Renewed geopolitical tensions in the Middle East lift the US Dollar (USD) against the Japanese Yen (JPY). Traders await the release of the US April Consumer Price Index (CPI) inflation data later on Tuesday for fresh impetus.

CNN reported on Monday that some US President Donald Trump aides said Trump is now more seriously considering a resumption of major combat operations in Iran. Trump also stated that the ceasefire is on “massive life support” following Iran’s latest counterproposal to end hostilities. Signs of a prolonged conflict between the US and Iran might boost the Greenback in the near term.

The US CPI inflation report will be in the spotlight later in the day. The headline CPI inflation is expected to jump to 3.7% in April from 3.3% in March, driven by surging energy costs tied to the ongoing conflict in the Middle East.

Meanwhile, the core CPI inflation is predicted to rise to 2.7% during the same period from 2.6% in March. A hotter-than-expected report could further delay potential interest rate cuts from the US Federal Reserve (Fed) and underpin the USD against the JPY.

Nonetheless, the potential upside for the pair might be limited amid intervention fears. Japan’s Finance Minister Satsuki Katayama said on Tuesday that Japan and the United States (US) reaffirmed their ‌close cooperation on currency moves. Last week, Japan’s top foreign exchange official Atsushi Mimura stated that continued intervention was possible.

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.