Japanese Yen weakens to five-week low as US strikes on Iran lift US Dollar safe-haven appeal
- The Japanese Yen drops to its lowest level in over five weeks amid heightened tensions in the Middle East.
- Japan’s Composite PMI hits 51.4 in June, the fastest pace since February, but fails to support the Yen.
- Surging Crude Oil prices threaten Japan’s trade balance, further weakening the currency.
The Japanese Yen (JPY) kicks off the week under pressure, stretching its losing streak to a third consecutive day against the US Dollar (USD) on Monday. The Yen tumbled to its weakest level in over five weeks, dragged lower as the Greenback regained safe-haven appeal following a dramatic escalation in the Iran–Israel war.
Although the Yen is traditionally seen as a safe-haven currency, it struggled to benefit from it this time, overshadowed by the US Dollar’s stronger appeal after the United States (US) joined Israel in launching airstrikes on key Iranian nuclear sites, stoking fears of a wider regional crisis.
USD/JPY is surging higher during the European session, having breached its 100-day Moving Average (MA) to trade around 147.84 at the time of writing, up more than 1.15% on the day. The pair’s strong upward momentum reflects the broad strength of the US Dollar as traders flock to the Greenback for safety, shrugging off upbeat Japanese Purchasing Managers' Index (PMI) data and focusing squarely on escalating geopolitical tensions.
Meanwhile, the US Dollar Index (DXY) climbed back above the 99.00 mark, holding firm around 99.25 as risk-off flows underpin renewed demand for the world’s reserve currency.
Flash PMI data released earlier in the day showed Japan’s private sector activity gathering momentum but failed to lend any support to the Yen. The au Jibun Bank Japan Composite PMI rose to 51.4 in June from 50.2 in May, marking the fastest pace since February and the third straight month of growth. Notably, the Manufacturing PMI returned to expansion territory for the first time since May 2024, rising to 51.3 from 48.6 previously and surpassing forecasts of 49.5. Meanwhile, the Services PMI edged up to 51.5 from 51.0.
The surge in global Crude Oil prices amid Middle East tensions is piling extra pressure on the Yen. Japan imports the vast majority of its energy needs, so the recent spike in oil prices since the Middle East conflict flared up is likely to worsen the country’s trade balance. This growing import burden undermines investor appetite for the Yen, which is already losing ground to the resurgent US Dollar.
Citi analysts echoed this view in a recent client note, warning that “a rise in crude oil prices causes a deterioration not only in Japan’s trade balance but also its terms of trade, so it fundamentally acts to weaken the yen.” In their report, published by Reuters, Citi reiterated their forecast for the Japanese currency to slide further, targeting 150 per Dollar by September.
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.
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