Japanese Yen drifts lower against the US Dollar and draws closer to 40-year lows

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The Japanese Yen (JPY) ticks lower for the second consecutive day against the US Dollar (USD), reaching the 162.50 area on Friday, drawing closer to the 40-year low, at 162.84 hit earlier this month.

USD/JPY picks up to 162.50, approaching 40-year highs, at 162.84.
The US Dollar regains lost ground as geopolitical tensions return to the forefront.
Market expectations of global monetary tightening, amid the recovery in Oil prices, are keeping the Yen under pressure.

The Japanese Yen (JPY) ticks lower for the second consecutive day against the US Dollar (USD), reaching the 162.50 area on Friday, drawing closer to the 40-year low, at 162.84 hit earlier this month. A somewhat stronger USD, amid growing tensions in Iran, and higher Oil prices, which are expected to pressure central banks to hike interest rates, have proved a heavy weight for the JPY this week.

The safe-haven Greenback has shrugged off the bearish pressure stemming from softer-than-expected US inflation reports and regained lost ground against most of its peers, as concerns about the economic impact of the war in Iran increase.

Iran war is back in the spotlight

US and Iran have exchanged fire for the sixth consecutive day on Friday. Iranian authorities reported attacks on civilian infrastructure in Bandar Abbas, including energy sites and a train station, and threatened to close the Strait of Bab al-Mandeb, another key route for Oil supplies, which might boost prices and reactivate fears of a global economic recession.

Meanwhile, US President Donald Trump soured market mood further, accusing China of meddling in the 2020 election, an allegation that might endanger the frail trade truce between the world’s leading economies, further hindering global growth.

In Japan, Finance Minister Satsuki Katayama threatened again with decisive action to support the JPY, but the fundamental scenario has become more unfavourable for the Yen. Higher Oil prices will add pressure on the major central banks, including the US Federal Reserve (Fed), to tighten their monetary policies, while Japanese authorities are likely to limit Bank of Japan (BoJ) tightening plans, as they would oppose their growth plans. This is likely to keep a wide differential between the BoJ interest rates and those of the rest of the central banks, leaving the Yen at the mercy of carry traders.

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.