Key Moments
- USD/JPY traded around 163.90 in early Asian dealings while the yen hovered near a multi-decade low against the dollar.
- Japan’s June National CPI rose to 1.7% YoY and core CPI to 1.6% YoY, marking the first uptick in core inflation since March.
- The “core-core” CPI measure eased to 1.7% YoY, its lowest level since August 2022, ahead of a Bank of Japan policy meeting where rates are widely expected to remain unchanged.
Yen Holds Weak as Market Eyes Policy and Intervention Risks
The USD/JPY pair was little changed near 163.90 in early Asian trading on Friday, leaving the Japanese yen pinned close to a multi-decade low versus the US dollar. Market participants turned their attention to preliminary US S&P Global Purchasing Managers Index (PMI) readings due later on Friday, while monitoring Japanese policy signals and geopolitical developments.
Japan Inflation Data Mixed Ahead of BoJ Meeting
Fresh figures from the Japan Statistics Bureau on Friday showed that headline National Consumer Price Index (CPI) inflation increased to 1.7% year-on-year in June, up from 1.5% in May.
Core CPI, which excludes certain volatile components, registered 1.6% year-on-year in June compared with 1.4% previously, exactly matching market expectations. This marked the first pickup in core inflation since March.
In contrast, the “core-core” inflation measure – which removes both fresh food and energy prices – slipped to 1.7% year-on-year in June from 1.8% earlier. That was the lowest reading since August 2022.
| Inflation Measure | June Reading (YoY) | Previous Reading (YoY) | Comment |
|---|---|---|---|
| National CPI | 1.7% | 1.5% | Headline inflation accelerated |
| Core CPI | 1.6% | 1.4% | First rise in core inflation since March; in line with consensus |
| “Core-core” CPI | 1.7% | 1.8% | Lowest level since August 2022 |
The data arrived just days before the next Bank of Japan policy meeting, where the central bank is widely expected to keep interest rates unchanged. The latest CPI release had limited impact on the yen, as traders focused on the possibility of official action to support the currency.
Authorities Signal Readiness for Action
On Wednesday, Finance Minister Satsuki Katayama cautioned markets that authorities were prepared to respond to further weakness.
Katayama stated that officials stood ready to take “appropriate and bold action.” Katayama added that Japan’s policy on potential intervention remained unchanged and that it would take action if necessary.
Despite the warning, the yen remained subdued, with market participants maintaining heightened vigilance for any signs of direct intervention.
Geopolitical Tensions Support Dollar Tone
Heightened strains in the Middle East have the potential to underpin the US dollar against the yen in the near term. According to Reuters on Thursday, US President Donald Trump said the US would hold Iran responsible for the Houthis’ actions and warned Iran and its Houthi allies would both soon receive a “major military punishment.”
Japanese Yen: Background and Key Drivers
The article also outlined several structural factors that typically influence the Japanese yen (JPY), one of the most actively traded currencies globally.
Bank of Japan Policy and Yield Differentials
One of the Bank of Japan’s mandates is currency control, which makes its decisions central to the yen’s trajectory. The BoJ has on some occasions intervened directly in foreign exchange markets, usually to push down the yen’s value, though such actions are undertaken sparingly due to political considerations involving major trading partners.
The BoJ’s ultra-loose monetary stance between 2013 and 2024 contributed to yen depreciation as policy diverged from that of other major central banks. The recent, gradual scaling back of this ultra-loose approach has provided some support to the currency.
Over the past decade, the BoJ’s commitment to very accommodative policy widened the yield gap between Japanese government bonds and US Treasuries, particularly at the 10-year tenor, benefiting the US dollar relative to the yen. The BoJ’s 2024 decision to slowly move away from ultra-loose policy, alongside rate cuts at other major central banks, has begun to narrow this differential.
Risk Sentiment and Safe-Haven Demand
The Japanese yen is frequently viewed as a safe-haven asset. In periods of elevated market stress, investors often turn to the yen, reflecting its perceived stability and reliability. Such risk-off episodes tend to strengthen the yen against currencies considered comparatively riskier.
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