Key Moments
- USD/JPY slipped to around 163.10 in early Asian trading on Thursday, with the Yen still hovering near a four-decade low.
- Money markets priced in roughly 84% odds of a Bank of Japan rate hike by October after the June move to 1.0%.
- Japanese officials reiterated readiness for “appropriate and bold action” as geopolitical tensions in the Middle East intensified.
BoJ Signals Shift as Yen Stays Near Multi-Decade Lows
USD/JPY eased to about 163.10 during early Asian hours on Thursday, reflecting modest strengthening in the Japanese Yen (JPY). Despite the pullback, the currency remains close to a near forty-year low, with fiscal concerns continuing to pressure the Yen. Market participants are closely watching for any signs of direct action from Japanese authorities to support the currency.
The Bank of Japan (BoJ) has indicated it may move further away from its long-standing ultra-loose monetary stance, with policymakers pointing to the possibility of normalizing interest rates. This more hawkish tone from the central bank is seen as a potential source of support for the JPY against the US Dollar (USD).
Rate Expectations and Market Pricing
Following the BoJ’s decision in June to raise interest rates to 1.0%, money market pricing has shifted more decisively toward additional tightening by October. Overnight-index swaps now reflect around an 84% probability of another move by that time, up from roughly 72% before a Bloomberg report highlighted the changing expectations.
| Indicator | Previous Level | Current Level |
|---|---|---|
| USD/JPY (early Asian session Thursday) | – | around 163.10 |
| BoJ policy rate (after June decision) | – | 1.0% |
| Implied odds of BoJ hike by October (OIS) | 72% | 84% |
Intervention Risks and Official Warnings
Japanese policymakers have stepped up verbal guidance as the Yen’s weakness persists. Japan’s Finance Minister Satsuki Katayama on Wednesday warned that authorities are prepared to take action if needed, stating they are ready to implement “appropriate and bold action.” Katayama also stressed that Japan’s stance on potential foreign exchange intervention has not changed and that the government would move if circumstances warrant it.
Geopolitical Tensions and Support for the Dollar
Developments in the Middle East are adding another layer of uncertainty for currency markets and could lend short-term support to the US Dollar. Iran’s Foreign Minister Abbas Araghchi said on Wednesday that Tehran would respond in kind to any attack on its infrastructure, after US President Donald Trump threatened to bomb a bridge or power plant for every ship targeted in the Strait of Hormuz, per the Guardian.
On Thursday, Kuwait’s army reported it was intercepting hostile drones following several days of Iranian strikes on the country. At the same time, Iran’s semi-official Mehr agency reported that a site near Ahwaz was struck in a US missile attack.
Understanding the Yen: Policy, Yields, and Risk Sentiment
The Japanese Yen (JPY) is among the most actively traded currencies globally. Its valuation is influenced broadly by Japan’s economic performance, but in practice is heavily driven by the Bank of Japan’s policy stance, the spread between Japanese and US bond yields, and overall risk appetite in global markets, among other factors.
Role of the Bank of Japan
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 and Yen Performance
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.
Safe-Haven Dynamics
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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