The USD/JPY pair posts modest gains near 163.50 during the Asian trading hours on Thursday. The US Dollar (USD) strengthens against the Japanese Yen (JPY) on a hawkish hold from the US Federal Reserve (Fed). The Bank of Japan (BoJ) will announce its interest rate decision later on Friday, with no change in rates expected.
As widely expected, the Fed held the interest rates steady at 3.50%–3.75% at its July policy meeting on Wednesday, while hinting at a hawkish shift driven by persistent inflation and rising energy costs. The decision has three dissents voting for a rate increase, likely boosting odds of a September hike.
Fed Chairman Kevin Warsh said during the press conference that while the Fed won’t provide hints on where rate policy is heading, it will take necessary steps to meet its 2% inflation target.
Meanwhile, rising tensions in the Middle East could boost the Greenback against the JPY. The Guardian reported that the US military began launching strikes against Iran late Wednesday, retaliating against Iranian missile attacks on American forces in the region. Iranian media said the US military hit the south-western Iranian city of Abadan as well as Qeshm Island.
Traders await the BoJ interest rate decision later on Friday. The Japanese central bank is likely to keep rates steady at 1.0% at its July meeting but leave scope for further hikes with hawkish communication.
“The BOJ is likely to maintain its view that risks to the price outlook are skewed to the upside,” said analysts at Mitsubishi UFJ Morgan Stanley Securities. “The timing could be pushed forward to September or October if the BOJ heightens alarm over an inflation overshoot or if relentless yen falls lead the administration to judge a rate hike is inevitable,” they said.
Yen risks build as BoJ hawkish hold could amplify tightening expectations
Scotiabank strategists caution that the balance of risks around the end of the week remains skewed toward further Yen strength, highlighting the policy backdrop as a key driver. They “see considerable risk into the end of the week, and note the potential for domestically-driven strength if BoJ policymakers deliver a hawkish hold and seek to build on the 25bpts of tightening (by December) currently priced into the short-term rates market,” underscoring how even a non‑move accompanied by firmer guidance could reinforce existing rate expectations and support JPY.
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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