Japanese Yen gains as easing risk aversion weighs on USD

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USD/JPY falls as the US Dollar weakens after Israel and Lebanon agreed to a ceasefire, easing safe-haven demand.
Trump told aides he would consider ending the Iran ceasefire if Tehran kills US troops.
Japan’s Finance Minister Katayama emphasized that persistent energy market volatility requires Japan to remain prepared for "appropriate action."

USD/JPY halts its four-day winning streak, trading around 159.90 during the Asian hours on Thursday. The pair depreciates as the US Dollar (USD) loses ground amid easing risk aversion following the news that Israel and Lebanon on Wednesday agreed to renew a ceasefire. However, it would require a "complete cessation" of fire by Iran-backed Hezbollah. The agreement was announced in a joint statement after US-led talks in Washington.

Israel and Lebanon do not have formal diplomatic relations, though also agreed to establish a number of “pilot security zones" in which the Lebanese armed forces "will take exclusive control of the territory to the exclusion of all non-state actors."

However, the Wall Street Journal reported on Thursday that the US President Trump has told aides that he would consider ending the ceasefire with Iran if Tehran kills US troops. Trump insisted that the week-long pause in airstrikes remains intact despite a steady stream of violent skirmishes. Moreover, Trump said in a New York Post interview that the blockade lasting until Labor Day is unlikely but possible, effectively extending the market's timeline for a Hormuz reopening.

SMBC Nikko strategist Makoto Noji warned on Tuesday that Japan faces a potential "historic Yen collapse" fueled by prolonged oil price volatility and loose fiscal policy. To combat this, Noji urged policymakers to deploy a coordinated, three-pronged strategy of interest rate hikes, a halt to fiscal expansion, and further market interventions, arguing that no single measure can solve the crisis alone.

Meanwhile, Finance Minister Satsuki Katayama declined to comment on specific currency movements or recent intervention data. However, she emphasized that persistent energy market volatility requires Japan to remain prepared for "appropriate action." Katayama framed potential interventions as broader economic management rather than simple exchange-rate defense, adding that Tokyo is closely coordinating and actively monitoring the markets alongside the United States.

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.