Japanese Yen drifts lower vs firmer USD on Iran tensions; intervention risks limit losses

USD/JPY attracts some dip-buyers as Iran tensions and hawkish Fed bets revive the USD demand.
Reviving inflationary concerns act as a tailwind for the US bond yields, also underpinning the USD.
Intervention fears and expectations for a BoJ rate hike in June should help limit deeper JPY losses.

Haresh Menghani FXStreet

The USD/JPY pair reverses a modest Asian session dip to the 156.50-156.45 area on Monday as the safe-haven US Dollar (USD) draws support from persistent geopolitical uncertainties. Spot prices reclaim the 157.00 mark, though any meaningful upside still seems elusive in the wake of speculations that Japanese authorities might step in to prop up the domestic currency.

US President Donald Trump and Iran both rejected each other’s peace proposals for ending the war and the gradual reopening of the Strait of Hormuz amid major disagreements over Iran's nuclear program. In fact, the Wall Street Journal reported that Iran has rejected US demands to dismantle its nuclear facilities and suspend uranium enrichment for 20 years. US President Donald Trump quickly lashed out at the Iranian response, calling it "totally unacceptable." This comes on top of renewed hostilities in the Strait of Hormuz and keeps geopolitical risks in play, underpinning the USD's reserve currency status and offering some support to the USD/JPY pair.

Meanwhile, the US-Iran standoff triggers a fresh leg up in Crude Oil prices and revives inflationary concerns. Apart from this, the upbeat US Nonfarm Payrolls (NFP) report released on Friday reaffirms hawkish US Federal Reserve (Fed) expectations and acts as a tailwind for the US Treasury bond yields. This turns out to be another factor benefiting the USD and contributing to the bid tone surrounding the USD/JPY pair. Meanwhile, reports last week that officials intervened in the FX market during holidays in early May might hold back traders from placing aggressive bearish bets around the Japanese Yen (JPY) and cap further gains for the currency pair.

Moreover, Japan's top currency diplomat, Atsushi Mimura, had said on Thursday that Japan faces no constraints on how often it can intervene on currency markets and is in daily contact with US authorities. This reinforces that Japan remains committed to stemming speculative JPY moves. Adding to this, the Bank of Japan's (BoJ) upward revision of inflation forecasts and the 6-3 hawkish vote split lifted bets for a potential rate increase as soon as June. This favors the JPY bulls, warranting caution before positioning for further USD/JPY gains.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

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.

How does broader risk sentiment impact the Japanese 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.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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