Yen Firms as US-Iran Ceasefire Hits Dollar, BoJ Steady

Key Moments

Currency Market Overview

USD/JPY retreats to around 159.35 during the Asian session on Thursday, with the Japanese Yen gaining ground against the US Dollar. The move reflects a softer Dollar following US President Donald Trump’s decision to extend the ceasefire with Iran, which has weighed on demand for the Greenback.

Participants are also awaiting the preliminary release of the S&P Global Purchasing Managers Index (PMI) later on Thursday, which could provide additional direction for currency markets.

US-Iran Ceasefire and Geopolitical Developments

Trump said on Tuesday that he is extending the ceasefire with Iran while awaiting a “unified proposal” from Tehran. Iran vowed not to reopen the Strait of Hormuz amid the US naval blockade despite the ceasefire extension. Earlier, the White House press secretary Karoline Leavitt said that she doesn’t view Iran’s assertion that it seized two ships in the Strait of Hormuz as a violation of the ceasefire.

In the broader regional context, Lebanon will push for a one-month extension of the current truce with Israel during a new round of meetings in Washington on Thursday. Talks between Lebanon and Israel on April 14 were their first in decades, and the US soon after announced the 10-day truce, set to expire on Sunday.

BoJ Policy Outlook and Market Pricing

Bank of Japan (BoJ) Governor Kazuo Ueda avoided signaling an April rate hike, citing high economic uncertainty from the “negative supply shock” of the war. Against this backdrop, financial markets now widely anticipate that the Japanese central bank will keep interest rates unchanged until at least June 2026.

The BoJ is widely expected to maintain its policy rate at 0.75% during the April meeting. At the same time, markets are now pricing in nearly a 72%-77% probability of a rate increase in May, with expectations for a hike of nearly 99% by June, according to Reuters.

Structural Drivers of the Japanese Yen

Core Determinants of Yen Performance

The Japanese Yen (JPY) is among the most actively traded currencies globally. Its valuation hinges on the trajectory of the Japanese economy and, more specifically, on Bank of Japan policy decisions, the spread between Japanese and US bond yields, and prevailing risk sentiment in global markets, among other factors.

Impact of Bank of Japan Decisions

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.

Yield Differentials Between Japan and the US

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.

Risk Sentiment and the Safe-Haven Role of the Yen

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.