The Japanese Yen (JPY) strengthened against the US Dollar (USD) on Thursday, with USD/JPY snapping a five-day winning streak as the greenback lost ground following reports that the US and Iran had reached a preliminary agreement to extend the existing ceasefire.
At the time of writing the pair is trading around 159.26.
Axios reported that Washington and Tehran agreed to a 60-day memorandum of understanding (MOU), although the agreement still awaits final approval from US President Donald Trump. Citing US officials, the report said shipping through the Strait of Hormuz would remain “unrestricted” and that Iran would have to remove all mines from the waterway within 30 days.
The headlines improved risk sentiment and weighed on safe-haven demand for the US dollar. The US dollar index (DXY), which tracks the greenback against a basket of six major currencies, traded around 99.00 after retreating from a seven-week high of 99.54 earlier in the day.
Oil prices also eased somewhat following the latest developments, providing additional support to the Japanese Yen. Japan relies heavily on oil imported from the Middle East, making the yen vulnerable to sharp rises in energy prices.
Meanwhile, the latest US inflation data also put pressure on the greenback. The core personal consumption expenditure (PCE) price index, the Federal Reserve’s (Fed) preferred inflation gauge, rose 0.2% MoM in April, below market expectations and lower than the 0.3% rise recorded in March. On an annual basis, core PCE rose to 3.3% from 3.2% in March, matching forecasts.
The data has done little to change the current hawkish Fed narrative, with traders still weighing the possibility of an interest rate hike later this year as higher oil prices keep inflation risks at bay.
St. Louis Fed President Alberto Mussalem said Thursday that “there is a situation where the economy may require a rate increase” and warned that “if we don’t see deflation in the next 1-2 quarters, it would worry me.”
Attention now turns to the data-packed Japanese economic calendar, with Tokyo consumer price index (CPI), unemployment rate and retail trade data due on Friday.
Masazumi Wakatabe, a former deputy governor of the Bank of Japan (BOJ), said “whether the central bank raises rates in June is not the essential issue,” Reuters reported on Thursday, adding that “what really matters is whether the economy is in a position where interest rates can be raised.”
Bank of Japan FAQ
The Bank of Japan (BOJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and exercise currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan initiated an extremely loose monetary policy in 2013 to stimulate the economy and boost inflation amid a low-inflation environment. The bank’s policy is based on quantitative and qualitative easing (QQE) or printing money 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 its ultra-loose monetary policy stance.
The bank’s massive stimulus caused the yen to depreciate against its major currency peers. This process accelerated in 2022 and 2023 due to growing policy differences between the Bank of Japan and other main central banks, which opted to sharply raise interest rates to fight decades-high levels of inflation. The BOJ’s policy caused the gap with other currencies to widen, driving down the value of the yen. This trend partially reversed in 2024, when the BOJ decided to abandon its ultra-loose policy stance.
A weaker yen and rising global energy prices led Japanese inflation to exceed the BOJ’s 2% target. The prospect of rising wages in the country – a key element fueling inflation – also contributed to the move.
