Japanese Yen hangs near YTD low vs. USD amid Middle East tensions, intervention fears

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The USD/JPY pair consolidates around mid-159.00s during the Asian session on Thursday and remains within striking distance of its highest level since July 2024, touched earlier this month.

USD/JPY bulls pause for a breather amid fears of JPY intervention, though the downside appears limited.
War-driven economic concerns continue to undermine the JPY and lend support to the currency pair.
Inflation fears and hawkish Fed bets underpin the USD, further acting as a tailwind for the spot prices.

The USD/JPY pair consolidates around mid-159.00s during the Asian session on Thursday and remains within striking distance of its highest level since July 2024, touched earlier this month.

The Japanese Yen (JPY) continues with its relative underperformance amid concerns that the war-driven surge in energy prices would weigh on Japan's trade balance and economic outlook. Furthermore, a sustained increase in Oil prices would drive up inflation and create a classic stagflationary environment, complicating the Bank of Japan's (BoJ) normalization efforts. This, along with the underlying US Dollar (USD) bullish sentiment, acts as a tailwind for the USD/JPY pair.

Iran's foreign minister said on Wednesday that Tehran is reviewing a US proposal to end the war but has no intention of holding talks to wind down the widening Middle East conflict. Furthermore, the deployment of additional US troops in the region points to the risk of a further escalation of the conflict and overshadows US President Donald Trump's ceasefire rhetoric. Apart from this, hawkish US Federal Reserve (Fed) expectations benefit the USD and support the USD/JPY pair.

In fact, traders have nearly priced out the possibility of any further rate cuts by the Fed and are rapidly increasing bets for a hike by the end of this year. The hawkish outlook, along with persistent geopolitical uncertainties, continues to underpin the USD's global reserve currency status and suggests that the path of least resistance for the USD/JPY pair is to the upside. However, intervention fears hold back the JPY bears from placing fresh bets and cap the upside for spot 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.