Japanese Yen seems vulnerable near one-month low vs USD amid US-Japan rate gap, Iran risks
- USD/JPY enters a bullish consolidation phase near a one-month high, touched on Friday.
- Japan’s fiscal woes and the US-Japan rate gap undermine the JPY, supporting spot prices.
- Fresh US strikes on Iran underpin the safe-haven USD and act as a tailwind for the pair.
The USD/JPY pair kicks off the new week on a subdued note and trades around the 160.00 psychological mark during the Asian session, just below a one-month high, touched on Friday. The fundamental backdrop, meanwhile, seems tilted in favor of bullish traders and suggests that the path of least resistance for spot prices remains to the upside.
The Japanese Yen (JPY) might continue with its relative underperformance amid market anxieties over Japan's worsening public finances and expansionary fiscal policies. Adding to this, US Treasury Secretary Scott Bessent said on Sunday that the recent JPY move is pretty well contained, dampening hopes for another joint Japan-US intervention. Furthermore, borrowing costs in Japan remain significantly lower than in other major economies, including the US, which keeps the so-called JPY carry trade active and acts as a tailwind for the USD/JPY pair.
The Bank of Japan (BoJ) increased its short-term policy rate to 1.00% in June, or the highest level in 31 years. Moreover, financial markets are pricing in an 80% chance that the BoJ will slowly narrow this difference with another rate hike in September. On the other hand, the Fed's benchmark rate ranges between 3.5% and 3.75%. Furthermore, Fed Chair Kevin Warsh's hawkish remarks at the Jackson Hole Symposium on Friday lifted market bets for a September rate hike. This, in turn, would leave a rate gap of around 250-275 basis points (bps) and favors JPY bears.
Adding to this, fresh US strikes on Iran keep the geopolitical risk premium in play, which helps the safe-haven US Dollar (USD) preserve Friday's strong gains and validates the positive outlook for the USD/JPY pair. Reports suggest that US forces have struck two Iranian launchers on Larak Island in Iran. Iran retaliated by launching ballistic missiles from Tehran, Lorestan, Karaj, Khorramabad and Shiraz, and anti-ship cruise missiles from southern Iran toward the Strait of Hormuz. This raises the risk of further escalation of tensions and favors USD bulls.
USD/JPY 4-hour chart
Technical Analysis
The USD/JPY pair consolidates just under the 200-period Simple Moving Average (SMA), keeping the near-term bias neutral as bulls struggle to extend the latest advance. Spot prices hold above the 100-period SMA at 159.12 and the 50.0% Fibonacci retracement of the recent sharp corrective decline from a four-decade high, at 159.61, suggesting a still constructive undertone while the broader upswing from the 23.6% retracement at 157.31 remains intact.
On the topside, immediate resistance appears at the 200-period SMA at 160.34, followed by the 61.8% Fibo. retracement at 160.64 and then the 78.6% level at 162.10. On the downside, initial support is seen at the 50.0% retracement at 159.61, ahead of the 100-period SMA at 159.12. A deeper pullback would expose the 38.2% retracement at 158.58 and the 23.6% level at 157.31 as lower structural cushions.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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