Japanese Yen softens on renewed US-Iran tensions, Japan flags intervention risk

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USD/JPY trades with mild gains around 162.40 in Friday’s Asian session.
The US is carrying out major strikes on Iran for the sixth consecutive day, lifting the US Dollar.
Japan’s Katayama said authorities are ready to act on currency moves whenever necessary.

The USD/JPY pair posts modest gains near 162.40 during the Asian trading hours on Friday. The US Dollar (USD) strengthens against the Japanese Yen (JPY) as the United States (US) launches a new wave of strikes against Iran for a sixth night in a row. Traders will keep an eye on the preliminary reading of the Michigan Consumer Sentiment Index for July later on Friday.

The US Central Command (CENTCOM) said on Thursday that it launched a new wave of strikes against Iran for a sixth night in a row, per the BBC. The US military said that the attacks were intended to "further degrade Iranian military capabilities" before saying it had boarded a vessel as part of its blockade of the Strait of Hormuz.

Iran's state media reported US missiles struck close to the island of Qeshm, near the strait, as well as in Bandar Abbas and Bushehr, the site of a nuclear power plant. Earlier this week, US President Donald Trump threatened to strike Iran's bridges and power plants if the country did not return to talks. Renewed Hormuz hostilities could boost the Greenback against the JPY in the near term.

Kyodo News Agency reported on Friday that the Japanese government will state in its economic blueprint that decisions on specific monetary policy tools should be left to the Bank of Japan (BoJ). A final version of the blueprint will also state that the government will reach a decision "by early August" on whether and by how much Japan will cut 8% consumption tax levied on food.

Traders remain on alert for possible intervention from Japanese officials. Japan’s Finance Minister Satsuki Katayama said on Friday that the authorities are ready to act on currency moves whenever necessary.

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.