Japanese Yen gains modestly, remains near multi-decade lows

• USD/JPY edges lower as a softer US Dollar lends modest support to the Japanese Yen.
• Traders remain alert for possible intervention by Japanese authorities.
• Hawkish Fed expectations and a wide US-Japan rate gap keep USD/JPY tilted to the upside.

USD/JPY trades slightly lower on Thursday as a mildly softer US Dollar (USD) lends support to the Japanese Yen (JPY). At the time of writing, the pair is trading around 162.45, hovering near 40-year highs.

Persistent weakness in the Yen keeps traders alert for possible intervention by Tokyo in the foreign exchange market. However, previous suspected intervention efforts proved short-lived because structural headwinds, including Japan's low interest rates and deteriorating fiscal outlook, remain a drag on the Yen.

Japan Chief Cabinet Secretary Minoru Kihara said on Thursday that the government wants to "secure market trust by stably lowering the government debt-to-GDP ratio." Kihara added that the government is watching markets with a "very high sense of urgency."

Meanwhile, a key near-term headwind for the Japanese Yen stems from renewed fighting between the United States (US) and Iran, which has triggered a rebound in Oil prices as security risks once again threaten to disrupt crude flows through the Strait of Hormuz.

Higher Oil prices tend to weigh on the Yen because Japan relies heavily on imported energy, particularly from the Middle East.

The rebound in Oil prices has also brought inflation back into focus, increasing pressure on central banks to keep monetary policy restrictive. Markets are currently pricing in a 63% probability of a Federal Reserve (Fed) interest rate hike at the September meeting.

Hawkish Fed expectations, combined with escalating geopolitical tensions, keep the US Dollar's downside contained. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading around 101.00 after hitting an intraday low of 100.79.

Meanwhile, the Bank of Japan (BoJ) remains on a policy normalization path, but its gradual pace of tightening continues to lag behind other major central banks. The wide interest rate differential between Japan and the United States continues to support USD/JPY.