Japanese Yen weakens vs USD as Iran tensions and rate gap counter intervention risks

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The USD/JPY pair builds on Friday's late rebound from the 161.30-161.25 region and gains strong positive traction at the start of a new week. The momentum lifts spot prices back above the 162.00 round figure during the Asian session and is sponsored by a combination of supporting factors.

USD/JPY attracts strong buyers on Monday amid a combination of supporting factors.
Economic risks and the wide US-Japan rate differential continue to undermine the JPY.
Escalating US-Iran tensions and rising Fed hike bets boost the USD, supporting the pair.

The US launched a new round of strikes on Iran over the weekend after Tehran announced the closure of the Strait of Hormuz. Iran responded with missile attacks on US military bases in the Gulf, adding a fresh uncertainty to global energy markets. Given that Japan relies on the critical waterway for over 90% of its Crude Oil imports, the latest development raises concerns about Japan's economy. Moreover, persistently wide US-Japan rate differential keeps the so-called carry trade active and undermines the Japanese Yen (JPY). This, along with a broadly firmer US Dollar (USD), lends additional support to the USD/JPY pair and contributes to the intraday move higher.

The US Federal Reserve (Fed) is expected to hold its benchmark rate in a target range of 3.50% to 3.75% in July, while the Bank of Japan (BoJ) has normalized its policy rate to 1.0% – the highest since 1995. This, however, still leaves a gap of around 250 to 275 basis points (bps), which has been a key factor behind the JPY's relative underperformance. The USD, on the other hand, attracts safe-haven flows amid a further escalation of tensions between the US and Iran. Adding to this, rising Crude Oil prices revive inflationary concerns and bolster bets for at least one interest rate hike by the Fed in 2026, which is seen as another factor lending support to the USD and the USD/JPY pair.

Meanwhile, traders remain on high alert amid growing speculations that Japanese authorities will step in again to prop up the domestic currency. This might hold back the JPY bears from placing aggressive bets and keep the currency pair below a four-decade high, touched earlier this month. In the absence of any relevant market-moving economic releases, traders on Monday will take cues from speeches by influential FOMC members later during the North American session. The focus, however, will remain glued to the latest US inflation figures and Fed Chair Kevin Warsh's congressional testimony, which should provide some meaningful impetus during the latter part of the week.

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.