Japanese Yen bulls seem hesitant as US-Japan rate gap counters intervention risks
- USD/JPY trades with a negative bias as JPY bears turn cautious amid intervention risks.
- A softer USD contributes to the weaker tone, though the downside remains cushioned.
- The wide US-Japan rate differential holds traders from placing aggressive bearish bets.
The USD/JPY pair edges lower during the Asian session on Thursday and, for now, seems to have snapped a four-day winning streak, though it lacks bearish conviction. Spot prices currently trade just below mid-162.00s and remain within striking distance of a four-decade high touched last Wednesday.
Traders remain on high alert amid speculations that Japanese authorities will step in to prop up the domestic currency, which, in turn, prompts some unwinding of bearish bets around the Japanese Yen (JPY). The US Dollar (USD), on the other hand, struggles to attract any meaningful buyers in the absence of a notable hawkish shift in the FOMC Minutes and turns out to be another factor acting as a headwind for the USD/JPY pair.
The downside for the USD, however, remains cushioned as traders are still pricing in the possibility of at least one interest rate hike by the Fed in 2026. The Minutes from the June 16–17 FOMC meeting, released on Wednesday, revealed that policymakers were divided with regard to the direction of interest rates. Fed officials, however, indicated that some policy firming would likely be warranted to return inflation to 2%.
Nevertheless, the Fed is seen holding its benchmark rate in a target range of 3.50% to 3.75% in July, while the Bank of Japan (BoJ) has normalized its policy rate to 1.0%. This leaves a gap of around 250 to 275 basis points (bps) and keeps the so-called JPY carry trade active. Furthermore, renewed US-Iran tensions could benefit the Greenback's reserve currency status and contribute to limiting the downside for the USD/JPY pair.
The US military unleashed a new wave of strikes against Iran in retaliation for Tehran’s attacks on commercial ships in the Strait of Hormuz. Iran retaliated by targeting US military installations and assets across Bahrain and Kuwait. Moreover, US President Donald Trump said on Wednesday that the ceasefire with Iran was now over. This favors the USD bulls and backs the case for some dip-buying around the USD/JPY pair.
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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