Yen Steady as Markets Weigh US-Iran Accord and BoJ Rate Path

Key Moments

USD/JPY Little Changed Despite Geopolitical and Policy Developments

The USD/JPY pair is trading essentially unchanged around 160.20 during Monday’s Asian hours. The US Dollar is easing slightly against the Japanese Yen following reports that the United States has agreed to a peace deal framework with Iran. Market participants are also positioning for key central bank decisions from the Bank of Japan and the Federal Reserve later in the week.

Reuters reported on Sunday that the US and Iran have agreed on a framework to end their war, lift the US blockade of Iran, and reopen the Strait of Hormuz. In addition, the United Kingdom, France, Germany and Italy indicated they were prepared to remove sanctions on Iran in response to actions on its nuclear program.

However, uncertainty persisted after US President Donald Trump warned that if Iran did not reach a final nuclear agreement with the US, he would resume military operations against Tehran.

“I think we’ll see the dollar fall over the course of the next few sessions. We’ll probably see some of the risk currencies like Aussie and yen appreciate a little bit. But I don’t think we’re going to see any huge moves,” said Nick Twidale, chief market strategist at ATFX Global in Sydney.

Central Banks in Focus: Fed on Hold, BoJ Poised to Hike

The Federal Reserve is expected to keep its main policy rate unchanged at its June meeting on Wednesday, maintaining a “wait-and-see” stance. Traders will be watching closely to see how new Fed chair Kevin Warsh guides the central bank into its next phase.

At the same time, the Bank of Japan is widely anticipated to raise its benchmark rate to the highest level since 1995, despite the absence of its governor. With a move on Tuesday already almost fully priced in, the market’s attention is shifting to how quickly and how far the BoJ might tighten thereafter.

A Reuters poll showed economists expect the BoJ to lift rates to 1.0% in June and then raise them again to 1.25% in the fourth quarter (Q4).

Japanese Yen: Key Drivers and Market Dynamics

The Japanese Yen (JPY) ranks among the world’s most actively traded currencies. Its valuation is influenced broadly by the performance of the Japanese economy, and more specifically by Bank of Japan policy, yield differentials between Japanese and US government bonds, and overall risk sentiment in global markets, among other factors.

One of the BoJ’s mandates is currency control, making its actions especially important for the Yen. The central bank has at times intervened directly in foreign exchange markets, generally seeking to weaken the Yen, although it tends to avoid frequent intervention due to political sensitivities with major trading partners.

According to the article, the BoJ’s ultra-loose monetary stance between 2013 and 2024 contributed to Yen depreciation against major peers, reflecting a growing policy divergence between the BoJ and other leading central banks. The gradual unwinding of this ultra-loose approach has more recently provided some support to the currency.

Yield Differentials and Safe-Haven Demand

Over the past decade, the BoJ’s commitment to ultra-loose policy widened the gap between Japanese and US interest rates, particularly at the 10-year maturity. This divergence supported a wider yield spread between 10-year US and Japanese government bonds, favoring the US Dollar over the Yen.

The BoJ’s 2024 decision to begin moving away from its ultra-loose stance, combined with interest rate cuts at other major central banks, has started to narrow this yield differential.

The Yen is also viewed as a safe-haven asset. In periods of market turbulence, investors tend to allocate more capital to the Japanese currency, reflecting its perceived stability and reliability. Such episodes of market stress are therefore typically associated with Yen strength relative to currencies seen as riskier.