Yen Weakens as Dollar Gains on Iran Conflict

The Japanese yen fell to around 156.5 per dollar on Monday, extending losses from last week as the dollar strengthened following US and Israeli strikes on Iran over the weekend. The attacks resulted in the death of Iran’s Supreme Leader, Ayatollah Ali Khamenei, and the effective closure of the Strait of Hormuz. Tehran retaliated by targeting US assets across the region, raising concerns of a wider conflict. The yen also faced pressure from an increasingly uncertain path for Bank of Japan monetary policy. Last week, the Japanese government nominated two reflationist academics to the BOJ’s policy board, while PM Sanae Takaichi reportedly voiced concerns about additional rate hikes during a meeting with Governor Kazuo Ueda. BOJ officials pushed back, keeping the door open to a near-term rate hike. Meanwhile, Finance Minister Satsuki Katayama said authorities are monitoring the yen’s decline “with a strong sense of urgency” and are in close communication with the US.

The Japanese yen strengthened to around 155.9 per dollar on Friday but remained on track for a second consecutive weekly decline amid uncertainty over Bank of Japan policy. Earlier this week, the Japanese government nominated two reflationist academics to the BOJ’s policy board, while PM Sanae Takaichi reportedly expressed concerns about additional rate hikes during a meeting with Governor Kazuo Ueda last week. Meanwhile, hawkish board member Hajime Takata called for further rate increases and guidance indicating that the price stability target is nearly achieved. Governor Ueda also reportedly said the central bank would carefully assess incoming economic data at its March and April meetings before making rate decisions, leaving the door open for a near-term hike. On the data front, Tokyo’s inflation slowed to the lowest pace in over a year, as government utility subsidies eased household energy costs, supporting expectations that the BOJ may hold off on immediate rate increases.

The Japanese yen strengthened past 156 per dollar on Thursday, snapping a two-day slide as hawkish signals from the Bank of Japan supported domestic yields. Board member Hajime Takata, regarded as the most hawkish member, called for further rate hikes and for guidance reflecting that the price stability target is nearly met. Governor Kazuo Ueda also reportedly said the central bank will carefully review economic data at its March and April meetings before deciding on rate adjustments, leaving the door open for a near-term hike. These developments followed the Japanese government’s nomination of two reflationist academics to the central bank's policy board, reinforcing expectations that the BOJ will proceed cautiously with further tightening. Prime Minister Sanae Takaichi also reportedly voiced concerns over additional rate hikes during a meeting with Ueda last week.