Japanese Yen holds ground despite rising oil prices
- USD/JPY may rise as rebounding oil prices pressure the Yen, given Japan's heavy reliance on oil imports.
- US intercepted Iranian missiles, renewing Middle East geopolitical tensions and inflation concerns.
- Traders factor in a 76.6% chance of a September rate increase, keeping borrowing costs elevated.
USD/JPY loses ground after registering minor gains in the previous day, trading around 163.70 during the Asian hours on Wednesday. The pair may regain ground as the Japanese Yen could come under pressure from rebounding oil prices. Renewed hostilities in the Middle East have reignited geopolitical tensions, keeping investor focus firmly on inflationary risks and the broader interest rate outlook. Crucially, as a major net importer of oil, Japan remains particularly vulnerable to rising energy costs.
Traders await the upcoming inflation and labor market data from Tokyo. Year-over-year Tokyo CPI excluding fresh food is expected to accelerate to 1.7% in July, up from 1.6% previously. Meanwhile, headline inflation previously stood at 1.7%, and CPI excluding both food and energy came in at 1.9%. On the employment front, Japan’s unemployment rate is forecast to hold steady at 2.5%.
Additionally, the USD/JPY pair may appreciate as the US Dollar (USD) could find support from escalating risk aversion, stemming from an Iranian attack targeting US troops stationed across the region, with Iran firing multiple ballistic missiles toward a US base in Jordan around 5:45 pm ET.
According to statements and video footage released by the US military, all of the surprise IRGC missiles were successfully intercepted. The strike is widely believed to be a direct response to recent US actions targeting Iranian navy boats.
Meanwhile, investors are closely monitoring the Federal Reserve’s (Fed) upcoming policy decision, where the central bank is widely expected to leave interest rates unchanged. Despite repeated calls from US President Donald Trump for lower interest rates, market sentiment remains cautious; traders are currently pricing in a 30.5% chance of an immediate rate hike, an unusually high level of uncertainty so close to a policy announcement. Looking further ahead, markets are also factoring in a 76.6% probability of a rate increase in September, reinforcing expectations that borrowing costs could remain elevated for longer.
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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