Yen Slips as BoJ Split, Current Account Deficit Lift USD/JPY

Key Moments

Yen Weakens as BoJ Opinions Reveal Policy Split

USD/JPY is rising in Asian trading on Monday, moving near 158.20 after modest losses in the previous session. The move reflects continued weakness in the Japanese Yen (JPY). It follows the release of the Bank of Japan’s (BoJ) Summary of Opinions from its July 30-31 policy meeting.

The document reveals a clear split among policymakers. Some board members favored keeping interest rates unchanged while assessing the delayed effects of earlier hikes. Others supported maintaining or even speeding up tightening. They cited rising upside risks to inflation. At the same time, policymakers noted that Middle East tensions are weighing on economic activity. However, strong AI-related demand and a moderately improving domestic backdrop could offset some of that weakness.

Japan’s Current Account Swings Into Deficit

Fresh data added to pressure on the Yen. Japan reported its first current account deficit in 17 months in June. Sizable dividend payments to overseas investors drove much of the shortfall. These investors have been directing substantial funds into Japanese assets.

According to Finance Ministry data released Monday, the current account showed a JPY 92.3 billion ($584.51 million) deficit. The result was well below economists’ median forecast of a JPY 1.51 trillion surplus in a Reuters poll. It also marked a sharp reversal from the JPY 1.28 trillion surplus recorded in June a year earlier.

Geopolitical Risks Support Dollar’s Safe-Haven Bid

The Dollar is also gaining support from broad risk aversion. As a result, USD/JPY is pushing higher. Market sentiment remains fragile as the ongoing US-Iran conflict enters a sensitive diplomatic period. Heavy military activity and strategic maneuvering around the Strait of Hormuz are keeping investors cautious.

Meanwhile, Iranian officials said on Sunday that Oman-mediated talks on managing the strait are making progress. Even so, demand for the Greenback as a safe-haven asset remains firm.

Inflation Data Seen as Key to Fed Path and U.S. Yields

TD Securities says the possibility of another Federal Reserve rate increase still “lingers.” However, the firm expects upcoming inflation data to play a key role in rate expectations. It forecasts this week’s consumer price data at “core and headline CPI this week (0.20% m/m and 0.15% m/m, respectively).” TD Securities says these results would “likely lead to further pricing out of hikes.”

The firm also notes that “the majority of the recent move higher in rates [has been] driven by Fed expectations.” Therefore, TD Securities expects rates could move lower as markets price out further hikes.

Musalem Emphasizes Inflation Risks as Fed Tone Stays Hawkish

Meanwhile, comments from Fed’s Musalem reinforced a cautious but hawkish policy stance. His address received an FXS Speechtracker score of 7.4, above the historical baseline of 7.0. The reading points to greater concern that inflation expectations could eventually lose their anchor. For now, however, those expectations remain stable and consistent with the 2% target.

Musalem highlighted core inflation amid volatile energy prices. He also expressed a preference for gradual rate hikes and estimated that core inflation is likely between 2.5% and 3%. His willingness to surprise markets when necessary suggests a bias toward tighter policy. It also supports a higher-for-longer rate outlook.

Musalem also argued that the Dollar’s reserve-currency role remains secure. He described the United States as “the fastest-growing, most innovative economy with strong rule of law.” That view adds to the favorable backdrop for the Greenback. Financial conditions also remain highly accommodative, while many asset prices stay elevated.

More broadly, the FXS Fed Sentiment Index remained unchanged at a hawkish 138.69, with no change from the previous reading. This suggests that Musalem’s comments were slightly more hawkish than his historical baseline. However, they did not alter the broader restrictive policy stance.

The index remains well above the neutral 100 level. Alongside the elevated FXS Speechtracker reading, this points to an already cautious and data-driven Fed approach. If inflation does not move clearly toward the 2% goal, markets may continue to price a risk of further tightening.