Japanese Yen weakens against recovering USD; seems vulnerable amid US-Japan rate gap

USD/JPY attracts some dip-buyers on Monday amid a combination of supporting factors.
Geopolitical uncertainties underpin the safe-haven USD amid oil-driven inflation risks.
The wide US-Japan rate gap and Japan’s fiscal woes weigh on the JPY, supporting the pair.

Haresh Menghani FXStreet

The USD/JPY pair rallies over 75 pips following an intraday slide to mid-158.00s and climbs to a fresh daily high during the first half of the European session on Monday. Spot prices currently trade around 159.25-159.30, up nearly 0.25% for the day, and draw support from a broadly firmer US Dollar (USD).

The risk of a further escalation of tensions between the US and Iran turns out to be a key factor that assists the safe-haven buck to move away from an over three-month low, touched last week. US Treasury Secretary Scott Bessent is due to announce what he has called the toughest sanctions in history on Iran at a press conference later today. In response, Iran's Supreme National Security Council secretary, Mohsen Rezaei, warned that the Islamic Republic would halt all oil exports through the Strait of Hormuz and anywhere else in the Persian Gulf if economic war continues.

Rezaei added that any country participating in the US sanctions would be treated as an act of war against Iran. This keeps the war-risk premium firmly on the table and helps revive demand for the Greenback. Furthermore, traders are still pricing in a greater chance of at least one interest rate hike by the US Federal Reserve (Fed) in 2026 amid inflation fears stemming from volatile oil prices. Hence, traders this week will scrutinize the release of the US Personal Consumption Expenditures (PCE) Price Index and Fed Chair Kevin Warsh's speech at the Jackson Hole Symposium.

In the meantime, the aforementioned fundamental backdrop might continue to lend some support to the Greenback. Moreover, the wide interest rate gap between Japan and other major economies, including the US, along with concerns about Japan's worsening fiscal condition, seems to undermine the Japanese Yen (JPY) and also act as a tailwind for the USD/JPY pair. This, to a large extent, counters expectations of faster interest rate hikes by the Bank of Japan (BoJ) and backs the case for a further intraday appreciating move for the currency pair.

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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