Yen Edges Up as Dollar, Oil Prices Retreat

The Japanese yen strengthened to around 163.5 per dollar on Monday as the dollar and oil prices retreated after the US and Iran suspended strikes against each other over the weekend amid efforts to revive diplomacy. Japan remains heavily dependent on Middle Eastern oil imports, leaving its economy exposed to supply disruptions and sharp swings in crude prices. On the domestic front, approval ratings for Prime Minister Sanae Takaichi slipped as the government's efforts to rein in inflation continued to fall short of household expectations. Despite the gains, the yen remained near 40-year lows as repeated warnings of possible market intervention failed to reverse the currency's weakness. Traders also largely dismissed remarks from Japan's Finance Minister that authorities were prepared to take decisive action in the foreign exchange market if necessary, along with reports that BOJ officials are open to raising interest rates at a faster pace than markets currently anticipate.

The Japanese yen traded at 163.8 per US dollar after hitting a fresh 40-year low of 163.99 in the prior session, as repeated warnings of possible intervention failed to curb the currency’s weakness amid broad US dollar strength. Traders brushed off remarks from Japan’s Finance Minister that the government was prepared to take decisive action in the forex market if needed, as well as reports that BOJ officials are open to a faster pace of rate increases than markets expect. Concerns over PM Sanae Takaichi’s fiscal policy are also weighing on the currency, while escalating US-Iran tensions have fueled concerns about Japan’s economy given its heavy reliance on imported energy, leaving the yen vulnerable to higher fuel costs. Meanwhile, Japan’s headline inflation rose to a six-month high in June, supporting the case for more rate hikes. The yen has fallen 0.9% so far this week, on track for its worst weekly performance since May, when it fell following Japan’s record intervention.

The U.S. Treasury Department said the Japanese yen has remained weak despite a narrowing in U.S.-Japan interest rate differentials, adding that excessive currency volatility is undesirable. In its semi-annual currency report released Thursday, the Treasury urged the Bank of Japan to continue raising interest rates, arguing that higher borrowing costs would help contain inflation and stabilize the exchange rate. "Monetary policy normalisation would help anchor inflation expectations and reduce excessive exchange rate volatility," the report said. The Treasury noted that while nominal wages have risen significantly, inflation continues to erode households' purchasing power, underscoring the need for further policy normalization. The comments came as the yen fell to a fresh 40-year low against the U.S. dollar Thursday, heightening market expectations that Japanese authorities could intervene in the foreign exchange market after repeatedly warning they would act against excessive moves.