Japanese Yen struggles near 160.50 as intervention fears offset US Dollar strength

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USD/JPY struggles for direction on Thursday as fears of intervention by Japanese authorities cap upside, even as the US Dollar (USD) strengthens amid renewed hostilities between the United States and Iran.

USD/JPY trades near 160.50 as intervention fears limit further gains.
Renewed US-Iran tensions support safe-haven demand for the US Dollar.
Elevated Oil prices and a wide Fed-BoJ interest rate gap continue to weigh on the Yen.

At the time of writing, the pair is trading around 160.50, a level that previously triggered intervention from Tokyo in late April. Japanese authorities have repeatedly signaled their readiness to take decisive action against excessive and disorderly currency moves.

On the geopolitical front, US President Donald Trump warned of further strikes against Iran as tensions escalated earlier this week after Tehran downed a US Apache helicopter near the Strait of Hormuz.

However, diplomatic efforts remain underway. Reuters reported on Thursday, citing Iranian and Western sources, that Tehran and Washington are still exchanging messages over the details of a memorandum of understanding, including mechanisms for the release of frozen Iranian funds.

The latest flare-up has cast doubt on the durability of the ceasefire announced in April and dented hopes for a near-term peace deal. This keeps geopolitical risks in play and supports safe-haven demand for the US Dollar.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is consolidating gains above the 100.00 mark.

The Greenback is also drawing support from hawkish Federal Reserve (Fed) expectations as the inflation outlook deteriorates amid the ongoing energy shock. Data released on Thursday showed the Producer Price Index (PPI) rose 6.5% YoY in May from 5.7% in April, above market expectations of 6.4%. Meanwhile, data released on Wednesday showed Consumer Price Index (CPI) inflation accelerated to 4.2% from 3.8%, the highest level since April 2023.

However, underlying inflation pressure remained relatively contained. Core PPI held steady at 4.9% YoY in May, below the 5.4% forecast, while Core CPI edged up to 2.9% from 2.8%.

Apart from US Dollar strength, elevated Oil prices remain a drag on the Japanese Yen (JPY) in the near-term, given Japan's reliance on imported energy from the Middle East.

Meanwhile, the BoJ's gradual approach to policy normalization keeps the interest rate gap with other major central banks wide, a persistent headwind for the Yen.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.