Japanese Yen stays on the back foot despite hawkish BoJ expectations
- USD/JPY struggles for a clear direction as the Greenback lacks momentum and the Yen remains broadly weak.
- US-Iran tensions keep energy prices elevated and cloud the Fed’s policy outlook.
- Japanese Yen remains on the back foot despite a possible Bank of Japan rate hike in September.
USD/JPY extends its sideways movement below the 160 psychological mark on Tuesday as the US Dollar (USD) struggles to gain traction. Receding expectations of a Federal Reserve (Fed) interest-rate hike at the upcoming meeting weigh on the Greenback, even as tensions in the Middle East keep the monetary policy outlook uncertain.
At the time of writing, the pair trades around 159.60. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 99.62 after recovering from the two-month low of 99.30 touched on Monday.
Elevated long-term US Treasury yields provide some support to the Greenback. The benchmark 10-year yield climbed toward 4.75% earlier on Tuesday, while the 30-year yield rose above 5.30%, its highest level since 2007, before both pulled back during American trading hours. The rise in yields reflects growing investor concerns over heavy government spending and persistent inflation.
Still, the latest US economic data point to moderating inflation, prompting markets to scale back expectations of a Fed rate hike in September. However, elevated Oil prices keep inflation risks alive and prevent traders from fully ruling out a rate increase later this year.
Iran’s top negotiator, Mohammad Bagher Qalibaf, said on Tuesday the Strait of Hormuz would remain closed until the US meets the conditions of the interim agreement, according to state media. US President Donald Trump said in a Truth Social post on Tuesday that “there are no talks or conversations going on, or scheduled, with Iran.
On the Japanese side, expectations that the Bank of Japan (BoJ) could raise interest rates as soon as September provide little support to the Japanese Yen (JPY). Fiscal concerns, the wide interest-rate gap between the United States and Japan, and higher Oil prices continue to weigh on the Japanese currency.
However, traders remain cautious as another round of intervention could be on the horizon if USD/JPY moves above 160.00. The risk of action by Japanese authorities limits the pair’s upside and keeps price action largely range-bound.
Looking ahead, the economic calendar is relatively light in both the US and Japan, with the FOMC Minutes due on Wednesday and Japan’s national Consumer Price Index (CPI) on Friday.
Bank of Japan FAQs
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%.
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.
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.
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.
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