USD/JPY pulls back to 159.50 amid rising intervention warnings
USD/JPY eases from highs above 160.00 with BoJ intervention looming.UD Dollar downside attempts remain limited on concerns about a protracted war in Iran.Fed Powell and Tokyo Inflation data are likely to provide some distraction later on Monday. rallyThe US Dollar (USD) has snapped a four-day rally against the Japanese Yen on Monday, and retreated from 20-month highs above 160.00 reached on Monday, a level considered a line in the sand for Japanese authorities.
Japan’s Top Currency Diplomat, Atsushi Mimura, observed earlier on Monday about rising speculative activity in currency markets and affirmed that Tokyo needs to take “decisive steps” if these trends continue. Mimura also stated that further falls in the currency could justify a near-term interest rate hike, providing additional support to the JPY.
US Dollar’s downside attempts, however, remain contained so far, as market concerns about a protracted war in the Middle East keep pushing investors towards the safe-haven US Dollar.
Kharg Island invasion remains an option, says TrumpUS President Donald Trump continues sending contradictory messages about Iran. In an interview at the Financial Times, Trump affirmed that the option of seizing Iran’s Kharg Island remains on the table, a short while after reiterating that there are direct and indirect talks with Iran, and that the country’s new authorities are “very reasonable”.
Meanwhile, the conflict widens. The irruption of the Iran-backed Houthi militias on the scene adds a new actor in an already complex war, which threatens to close the Strait of Bab el Mandeb, another chokepoint for Saudi Oil supply, which would boost Crude prices even higher.
In the economic docket, the Federal Reserve Chairman, Jerome Powell, will speak at a panel at Harvard University later on Monday and might provide further clues about the bank’s stance amid growing risks of stagflation. In Japan, the advanced Tokyo Consumer Prices Index (CPI) figures, Industrial Production and Retail Trade figures, due on the early Asian session, are likely to provide some fundamental background for the pair.
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.
