Japanese Yen struggles as BoJ policy outlook remains uncertain

Japanese Yen holds losses amid uncertainty over the Bank of Japan’s policy outlook.
Japan’s PM Takaichi may urge the BoJ to proceed cautiously with further rate hikes.
US Dollar trims losses as safe-haven demand persists amid uncertainty over the Middle East conflict.

Akhtar Faruqui FXStreet

USD/JPY gains ground for the second successive session, trading around 158.30 during the European hours on Wednesday. The pair appreciates as the Japanese Yen (JPY) struggles due to uncertainty surrounding the Bank of Japan (BoJ) policy outlook.

Traders speculate that Japanese Prime Minister Sanae Takaichi may urge the Bank of Japan (BoJ) to proceed cautiously with rate hikes after reports she expressed concerns about further tightening during a meeting with BoJ Governor Kazuo Ueda last month.

Governor Ueda signaled last week that interest rates may remain unchanged for an extended period due to the potential economic impact of the Middle East conflict. The BoJ is widely expected to keep its policy rate unchanged at next week’s meeting.

The US Dollar (USD) pares its daily losses as safe-haven demand persists amid ongoing uncertainty surrounding the Middle East conflict. US President Donald Trump said late Monday that the conflict could end soon.

However, US officials indicated on Tuesday that military operations in Iran were intensifying, with limited prospects for diplomatic negotiations. Meanwhile, Iran’s Revolutionary Guards warned that the Strait of Hormuz blockade would continue until US and Israeli attacks cease.

Traders will observe key US Consumer Price Index (CPI) data later in the day. Traders will shift their focus toward Friday’s Personal Consumption Expenditures (PCE) Price Index data. These figures may offer fresh signals on the Federal Reserve’s policy outlook.

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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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