Japanese Yen remains on the front foot as Middle East tensions rise
- The Japanese Yen attracts buyers for the third straight day amid the global flight to safety.
- Rising geopolitical tensions weigh on investors’ sentiment and boost safe-haven assets.
- The divergent BoJ-Fed policy expectations exert additional pressure on the USD/JPY pair.
The Japanese Yen (JPY) advances to over a one-week high against its American counterpart during the Asian session on Friday and draws support from a combination of factors. A further escalation of geopolitical tensions in the Middle East weighs on investors' sentiment and boosts demand for traditional safe-haven assets, including the JPY. Apart from this, the growing acceptance that the Bank of Japan (BoJ) will stick to the path towards monetary-policy normalization turns out to be another factor that contributes to the JPY's relative outperformance.
However, a modest US Dollar (USD) bounce from its lowest level since March 2022 assists the USD/JPY pair pare its heavy intraday losses to the 142.80-142.75 region. Any meaningful USD appreciation, however, seems elusive as signs of cooling inflation and a potential weakening in the labor market lifted bets for an imminent interest rate cut by the Federal Reserve (Fed) in September. This marks a significant divergence from hawkish BoJ expectations, which should continue to benefit the lower-yielding JPY and cap any recovery attempt from the USD/JPY pair.
Japanese Yen benefits from a further escalation of tensions in the Middle East and hawkish BoJ expectations
- Israel launched a pre-emptive attack against Iran. The Israeli Air Force conducted dozens of strikes across Iran, targeting nuclear and missile sites as well as military headquarters. Following the attack, Israeli Minister of Defense Israel Katz declared a special state of emergency in the country and warned that a missile and drone attack on Israel and its civilian population would occur soon.
- US Secretary of State Marco Rubio said in a statement that Israel took unilateral action and that the US is not involved in strikes against Iran. Meanwhile, Iran's Defence Minister Aziz Nasirzadeh had threatened to strike US bases in the region if conflict erupts over its nuclear program. This raises the risk of a broader regional conflict and boosts the safe-haven Japanese Yen.
- On the trade-related front, US President Donald Trump said on Wednesday that he will set unilateral tariff rates and inform trading partners within two weeks. Moreover, Trump's expanded steel tariffs, currently at 50%, apply to a range of household appliances, including dishwashers, washing machines, refrigerators, and more, adding a layer of uncertainty to the markets.
- A Reuters poll indicated earlier this week that a slight majority of economists expect that the Bank of Japan will forego another interest rate hike this year. Investors, however, seem convinced that the BoJ might continue to push for tighter monetary conditions and hike rates further as inflation in Japan has consistently exceeded the central bank's 2% target for more than three years.
- In contrast, traders ramped up bets that the Federal Reserve would resume its rate-cutting cycle in September after data released on Thursday pointed to signs of cooling inflation and a potential weakening in the labor market. The US Bureau of Labour Statistics reported that the Producer Price Index remained muted in May and rose 0.1% from a month earlier, vs. a 0.2% decline in April.
- In the 12 months through May, the PPI advanced 2.6% after rising 2.5% in April. A separate report showed US Initial Weekly Jobless Claims held steady at 248K last week, while continuing claims jumped to 1.951 million, or the highest level since November 2021. This comes on top of a marginal rise in US consumer prices, backing the case for further monetary policy easing by the Fed.
- The dovish outlook drags the US Dollar to its lowest level since March 2022 during the Asian session on Friday and weighs heavily on the USD/JPY pair. Traders now look forward to the Preliminary release of the Michigan US Consumer Sentiment Index and Inflation Expectations. The focus, however, will remain on developments surrounding Trump's trade policies and the Middle East conflict.
USD/JPY bears might now wait for a break below the 142.65 horizontal support before placing fresh bets
From a technical perspective, this week's failures to find acceptance above the 145.00 psychological mark and the subsequent fall favor the USD/JPY bears amid negative oscillators on hourly/daily charts. However, it will still be prudent to wait for some follow-through selling below the 142.65 and the 142.35 horizontal support before positioning for deeper losses. Spot prices might then weaken below the 142.00 round figure, towards the 141.65 intermediate support en route to the sub-141.00 levels.
On the flip side, recovery beyond the Asian session peak, around the 143.50-143.55 area, is likely to confront a stiff barrier near the 144.00 mark. A sustained strength beyond the latter might trigger a short-covering move and allow the USD/JPY pair to climb to the 144.50 area en route to the 145.00 round figure. The subsequent move-up could lift spot prices to the 145.45 zone, or a two-week high touched on Wednesday.
Japanese Yen FAQs
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.
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.
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.
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.