Japanese Yen strengthens on BoJ hawkish signals, intervention risks
- USD/JPY softens to around 163.10 in Thursdayâs early Asian session.
- The prospect of faster interest rate hikes from the BoJ underpins the Japanese Yen.
- Iran warned of a response if infrastructure is hit.
The USD/JPY pair edges lower to near 163.10 during the early Asian session on Thursday. However, the Japanese Yen (JPY) remains near a four-decade low as fiscal concerns weigh on the domestic currency. Traders are on high alert for possible intervention from Japanese authorities.
The Bank of Japan (BoJ) signaled a potential shift away from its ultra-loose monetary policy, with officials hinting at possible rate normalization. Hawkish rhetoric from the Japanese central bank could provide some support for the JPY against the US Dollar (USD).
Money markets raise their bets on a BoJ rate hike by October after the bank upped rates to 1.0% in June. Overnight-index swaps now imply around an 84% odds of a move in October, compared to a 72% probability seen before the Bloomberg report.
Japanâs Finance Minister Satsuki Katayama on Wednesday warned markets that authorities stood ready to take âappropriate and bold action.â Katayama added that Japanâs policy on potential intervention remained unchanged and that it would take action if necessary.
Escalating tensions in the Middle East could boost the Greenback in the near term. Iranâs Foreign Minister Abbas Araghchi said on Wednesday that Tehran would respond in kind to any attack on its infrastructure, after US President Donald Trump threatened to bomb a bridge or power plant for every ship targeted in the Strait of Hormuz, per the Guardian.
On Thursday, Kuwaitâs army said that itâs intercepting hostile drones, following several days of Iranian strikes on the country. Meanwhile, Iranâs semi-official Mehr reported that a location near Ahwaz was hit in a US missile strike.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the worldâs most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japanâs policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japanâs 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.
Over the last decade, the BoJâs 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.
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 Yenâs value against other currencies seen as more risky to invest in.
