Yen Near Lows as Policy, Geopolitics Offset Dollars

Key Moments

Yen Stays Weak as USD/JPY Holds Near Recent Peak

The USD/JPY pair is fluctuating within a tight band during the Asian session on Wednesday, last seen around the 159.30 level. This places the cross just under the one-week high reached in the previous session. Despite recent upside momentum, USD/JPY remains trapped within a well-established range that has prevailed for roughly the past month, suggesting traders remain cautious about committing to strong directional positions.

Geopolitical Tensions and Energy Risks Pressure the Yen

The Japanese Yen (JPY) continues to lag its peers amid ongoing worries about Japan’s economic outlook, particularly in relation to energy supply vulnerabilities. These concerns are tied to continued disruptions to shipping through the Strait of Hormuz, a key route for energy transport.

Market anxiety has been reinforced by the latest statements from both the United States and Iran. US President Donald Trump reiterated on Tuesday that the US Navy blockade of Iranian ports will remain in place. In turn, Iran’s military responded that it will not reopen the critical waterway while the naval blockade continues. This standoff is perceived as a risk factor for energy supplies and, by extension, for Japan’s economy, dampening demand for the Yen.

BoJ Policy Outlook Weighs on JPY, Intervention Fears Limit Losses

Expectations for the upcoming Bank of Japan (BoJ) meeting are adding further pressure on the Japanese currency. There is increasing consensus that the BoJ will leave interest rates unchanged at its April gathering, a stance that tends to undermine the Yen and offer some support to USD/JPY.

However, the policy picture is not entirely one-sided. Reuters, citing sources, reported on Tuesday that the central bank is likely to signal its willingness to raise borrowing costs as early as June, in response to rising inflation pressures. This potential shift in forward guidance tempers the negative impact of unchanged rates in April.

At the same time, the possibility of official intervention in currency markets is helping to cap further Yen weakness. Concerns that authorities could step in if JPY depreciation accelerates are acting as a brake on additional downside for the currency, limiting the upside in USD/JPY.

Dollar Softens on Ceasefire Extension and Oil Pullback

While the Yen remains under pressure, the US Dollar (USD) is also facing headwinds. The greenback is being weighed down by improved market sentiment following President Trump’s decision to extend the ceasefire with Iran indefinitely, announced just hours before it had been due to expire. This move eased some geopolitical tensions, curbing safe-haven demand for the Dollar.

A modest decline in Crude Oil prices is also contributing to the Dollar’s softness. Lower oil prices help alleviate inflation concerns, which, combined with receding expectations of a rate hike by the US Federal Reserve (Fed), are exerting additional downward pressure on the USD. Together, these forces are preventing USD/JPY from posting stronger gains, even as the Yen remains fundamentally weak.

Background: Key Drivers of the Japanese Yen

The Japanese Yen (JPY) ranks among the most actively traded currencies globally. Its valuation is broadly influenced by Japan’s economic performance, but more specifically by the Bank of Japan’s policy stance, the spread between Japanese and US bond yields, and overall risk sentiment among traders, among other elements.

Role of the Bank of Japan in Currency Dynamics

One of the Bank of Japan’s mandates is currency control, making its actions highly significant for JPY performance. The BoJ has at times intervened directly in foreign exchange markets, typically aiming to weaken the Yen, although it avoids frequent intervention due to political sensitivities among 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 gradual unwinding of this ultra-loose policy has given some support to the Yen.

Yield Differentials and Risk Sentiment

Over the last decade, the BoJ’s commitment to ultra-loose monetary settings contributed to a widening divergence from other central banks, especially the US Federal Reserve. This divergence led to a broader gap between 10-year US and Japanese government bond yields, reinforcing the US Dollar’s advantage over 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 Yen is also widely viewed as a safe-haven asset. In periods of financial or geopolitical stress, investors often turn to JPY due to its perceived stability and reliability. As a result, bouts of market turbulence tend to boost the Yen against currencies that are considered more risky, whereas calmer conditions can diminish its appeal.