Japanese Yen struggles despite retreating oil prices
- USD/JPY appreciated as higher oil prices forced Japanese energy importers to sell Japanese Yen.
- Japanese administration monitors market movements, including long-term rates, but declines to comment on potential forex intervention.
- Iran confirms indirect diplomatic channels with the US remain operational despite rising tensions between the two nations.
USD/JPY continues its winning streak for the sixth consecutive day, trading around 158.90 during the European hours on Monday. The pair appreciates as Japanese energy importers are forced to sell massive amounts of Japanese Yen (JPY) to buy the US Dollars (USD) needed to pay their inflated energy bills amid higher oil prices. However, oil prices pare daily gains after reports that Iranian and Omani technical teams met last week in Oman to negotiate a mechanism for safe transit in the Strait of Hormuz.
Elevated oil prices intensified inflation concerns and strengthened expectations for a near-term rate hike by the Bank of Japan (BoJ), which could limit the downside of the JPY. Last week, Bank of Japan board member Kazuyuki Masu urged a swift interest rate hike, pointing to growing, persistent inflation risks driven by the ongoing war.
Japan's Chief Cabinet Secretary, Seiji Kihara, stated that the administration is monitoring market movements, including long-term interest rates, with a very high sense of urgency. Despite the heightened vigilance, Kihara declined to comment on the possibility of government intervention in the foreign exchange markets.
However, the upside of the USD/JPY pair could be restrained as the US Dollar (USD) faces selling pressure on easing safe-haven demand. The Iranian foreign ministry has confirmed that indirect diplomatic channels with the United States remain operational despite the recent rise in tensions between the two nations. Officials in Tehran clarified that while the broader process of dialogue is currently navigating a highly challenging path, communication has not broken down.
Japanese Yen FAQs
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.
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