The Japanese Yen (JPY) has continued to weaken, with the USD/JPY pair trading near a 21-month high of 160.48 during Thursday's session, up 0.02% on the day [1][3]. This comes as the Bank of Japan (BoJ) released a report highlighting that the impact of a weak Yen shock on inflation is greater than that from an oil shock, pushing up prices for a wide range of goods and services and giving a bigger boost to consumer inflation excluding fresh food and energy [1]. The report also noted that under a risk scenario involving elevated oil prices, a weaker Yen, and stock declines, real GDP forecasts could be 0.1% to 0.2% lower in fiscal 2026-2028 compared to BoJ's median baseline projections, while core consumer inflation could overshoot and hover around 3% in fiscal 2026 and 2027 [1].
Market participants are closely watching for potential intervention from Japanese authorities, as Finance Minister Satsuki Katayama emphasized a "high sense of urgency" regarding speculative and weak-JPY moves driven by Middle East tensions [3]. Despite verbal interventions and BoJ Governor Kazuo Ueda reaffirming the central bank’s gradual tightening stance, the Yen remains under strain, with traders building short positions on expectations that neither further rate hikes nor official intervention will offer meaningful near-term support [2][3].
The EUR/JPY pair also edged lower after four days of gains, trading around 187.20, as the risk-sensitive Euro struggled amid increased risk aversion linked to geopolitical tensions in the Middle East [2]. The European Central Bank (ECB) is expected to leave interest rates unchanged, but may signal a rate hike as early as June to counter an energy-driven surge in consumer prices, with investors anticipating further tightening later this year if oil prices remain elevated [2].
The BoJ report warns that supply chain disruptions could sharply reduce real GDP and cause a non-linear rise in inflation, and that growth and price developments could deviate sharply from baseline projections depending on Middle East developments [1]. The Fed’s decision to hold rates steady, with a divided vote, and rising near-term inflation expectations in the US, are also contributing to the Greenback’s strength against the Yen [3].
CONCLUSION
The Japanese Yen remains under significant downward pressure due to central bank policy divergence, persistent inflation risks, and geopolitical tensions. Authorities in Japan are signaling readiness for intervention, but market sentiment suggests limited near-term support for the Yen. The BoJ’s report underscores heightened inflation risks and potential GDP downside, making the currency’s outlook highly sensitive to both domestic policy and global developments.