Japanese Yen pares hawkish BoJ-inspired gains; USD/JPY rebounds from sub-159.00 levels

USD/JPY drops to a one-week low as the BoJ’s hawkish pause provides a goodish lift to the JPY.
Economic concerns stemming from the Middle East conflict cap the JPY and limit losses for the pair.
The US-Iran peace talks uncertainty benefit the safe-haven USD and further supports spot prices.

Haresh Menghani FXStreet

The USD/JPY pair attracts some intraday selling after the Bank of Japan (BoJ) announced its policy decision and touches a one-week low earlier this Tuesday. Spot prices, however, manage to recover a major part of the losses and trade around the 159.30 area, down less than 0.10% for the day during the early European session.

As was widely anticipated, the Japanese central bank kept its benchmark interest rate unchanged at 0.75% at the conclusion of a two-day meeting. However, the 6-3 vote split, with three BoJ board members calling for a rate hike, along with an upward revision of inflation forecasts, keeps a June or July rate hike firmly on the table. This comes on top of a fresh intervention warning from Japan's Finance Minister Satsuki Katayama, saying that authorities were ready to take decisive action against speculative activity, lifting the Japanese Yen (JPY) and weighing on the USD/JPY pair.

In the post-meeting press conference, BoJ Governor Kazuo Ueda noted that real interest rates are at significantly low levels and acknowledged that the risk of inflation is significantly deviating upwards and exerting a negative impact on the economy. This, in turn, validates the hawkish outlook and remains supportive of the bid tone surrounding the JPY. However, economic concerns stemming from continued disruptions to energy supplies through the Strait of Hormuz cap JPY gains. This, along with a goodish pickup in the US Dollar (USD) demand, lends support to the USD/JPY pair.

Hopes for diplomatic efforts to end the Iran war receded after US President Donald Trump canceled his special envoy, Steve Witkoff, and Jared Kushner's planned visit to Pakistan. Furthermore, Trump reportedly was dissatisfied with Iran's new proposal on resolving the war, which would set ‌aside discussion of Iran's nuclear program. This, along with a standoff over the Strait of Hormuz, keeps geopolitical risks in play, which, in turn, is seen benefiting the USD's reserve currency status, which, in turn, assists the USD/JPY pair to rebound around 35-40 pips from sub-159.00 levels.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.

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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