Japanese Yen softens despite BoJ hawkish tone

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The USD/JPY pair edges higher to around 159.00 during the early European trading hours on Wednesday. The Japanese Yen (JPY) weakens against the Greenback due to surging energy prices driven by geopolitical tensions in the Middle East.

USD/JPY strengthens near 159.00 in Wednesday’s early European session.
Fed’s Barr said rates may need to hold steady for some time.
BoJ Minutes showed members agree that rate hikes are appropriate if the outlook is realized.

US President Donald Trump said on Tuesday that the US was making progress in its efforts to negotiate an end to the war with Iran, while Reuters reported that Washington had sent Iran a 15-point settlement proposal. Nonetheless, the peace talks remain uncertain as Iran's Revolutionary Guards said on Wednesday that they had fired missiles at Israel as well as military bases hosting US forces in Kuwait, Jordan and Bahrain.

Federal Reserve (Fed) Governor Michael Barr said on Tuesday that the central bank may need to keep interest rates steady "for some time" before further cuts are warranted, noting continued inflation above the Fed's 2% target and the risks posed by the conflict in the Middle East.

Hawkish tone from the Bank of Japan's (BoJ) January Minutes could support the JPY and create a headwind for the pair. Policymakers favored continued rate hikes. Some members emphasized the need for timely action to address mounting inflationary pressures and the weak yen's impact on prices.

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.