The USD/JPY pair holds steady around 157.25 during the Asian trading hours on Tuesday. The latest developments in the Middle East send oil prices higher, sparking further fears of instability in the region. The US April ISM Services Purchasing Managers Index (PMI) report will be published due later on Tuesday.
The United Arab Emirates said on Monday that it had intercepted a number of missiles fired from Iran. That’s the first time the UAE’s missile alert system was activated since the US-Iran ceasefire began last month. US President Donald Trump on Monday warned Iran that it will be “blown off the face of the earth” if it targets US ships that are protecting commercial vessels transiting the strait.
Meanwhile, Iran’s Foreign Minister Abbas Araghchi stated the current situation in the Strait of Hormuz makes it “clear that there’s no military solution to a political crisis.” Any signs of rising tensions in the Middle East could support the US Dollar (USD) against the Japanese Yen (JPY).
Traders remain on edge over the potential for Japanese authorities to step back into the market after last week’s intervention to curb weakness. Japanese Finance Minister Satsuki Katayama said Japan can take action against speculative foreign-exchange movements.
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.
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.
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.
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.
