War in the Middle East drove the yen to the edge of multi-decade lows and forced Japanese authorities to step in to support the currency, but even a ceasefire agreement between the United States and Iran has failed to meaningfully reverse its weakness.
Stocks and bonds surged on Monday after news of a planned halt to the U.S.-Iran conflict eased global inflation concerns, particularly for energy-importing economies such as Japan. The yen, however, barely moved, holding above the 160 per dollar level that had triggered official intervention just weeks earlier.
The currency now enters a critical week with the Bank of Japan expected to raise interest rates to a 31-year high, though markets worry the move may fall short of delivering the hawkish tone investors are seeking.
Attention is centered on Bank of Japan Deputy Governor Shinichi Uchida, who is set to brief reporters on behalf of Governor Kazuo Ueda, who is currently hospitalized. His comments will be closely watched for clues on the central bank’s future rate path.
“The yen is still rather weak on the background of the BOJ still being behind the curve,” said Naka Matsuzawa, chief strategist at Nomura Securities. “I don’t really think the BOJ can satisfy market expectations on hawkishness. The BOJ doesn’t want to go too much ahead of government policy stance, only to become a scapegoat.”
Markets have largely priced in a 25-basis-point hike to 1% on Tuesday, but speculative positioning remains heavily bearish on the yen, with net short positions at their highest level since July 2024, according to futures data.
Recent remarks by Ueda had pointed to the risk of energy-driven inflation feeding into broader price pressures. With his absence, Uchida’s briefing becomes the key communication moment for policymakers after a prolonged silence.
“Market players tried to read the difference in Ueda’s comments at each press conference to gauge his stance, but this time, they can’t do that,” said Kumiko Ishihara, senior analyst at Sony Financial Group.
Uchida, a veteran policymaker who played a central role in the BOJ’s exit from its decade-long stimulus program in 2024, is seen by analysts as pragmatic, balancing caution with flexibility in communication.
Analysts say a peace agreement in the Middle East broadly aligns with scenarios in which the BOJ had already revised inflation forecasts upward due to energy price shocks. Former BOJ chief economist Seisaku Kameda said the latest developments are unlikely to alter expectations for two rate hikes this year.
A prolonged conflict, by contrast, could have kept inflation near 3% for longer, potentially forcing faster tightening as the BOJ seeks to avoid falling behind the curve.
“The risk for accelerating inflation may weaken given the drop in oil prices,” said Masahito Sugawara, senior strategist at Daiwa Securities. “Market players have been bracing for a hawkish stance, but Deputy Governor Uchida’s comments may not be as aggressive as expected.”
Markets still anticipate at least one additional BOJ rate increase later this year. The central bank, once an outlier among major economies for maintaining ultra-loose policy, has shifted amid rising inflation pressures linked to global energy shocks.
Traders are also increasingly watching U.S. policy direction, with expectations building that the Federal Reserve’s next move could be a rate hike.
“Overall, gradual yen appreciation is expected, but volatility around central bank events will be key,” said Hirofumi Suzuki, chief FX strategist at SMBC. “If U.S. inflation pressures persist, the dollar may remain strong.”
Japan intervened in currency markets last month after the yen weakened past 160 per dollar, spending 11.7 trillion yen ($73.12 billion) to support the currency, a record monthly amount.
With BOJ policy expectations still relatively dovish compared with global peers, analysts warn that renewed downward pressure on the yen could again force the government to consider intervention.
“There is a risk that pressure will arise on the yen and dollar-yen could move toward 161,” said Masafumi Yamamoto, chief foreign exchange strategist at Mizuho Securities. “Concerns over intervention will likely increase.”
