USD/JPY extended Monday’s late retreat from the mid-162.00s, drawing follow-through selling in Tuesday’s Asian session and slipping to the 161.70–161.65 area. Losses were moderated by the absence of intervention from Japanese authorities and by underlying support for the pair. Reports that officials may be shifting away from telegraphing intervention and towards targeting speculators have so far produced little sustained market impact, while the wide gap in borrowing costs between Japan and peers such as the US has kept the carry trade in play, weighing on JPY as Middle East tensions add to macro risk.
Geopolitical concerns intensified after a maritime agency said an oil tanker was struck by an unidentified projectile while transiting the Strait of Hormuz, adding to unease tied to the US-Iran dispute over charging vessels to use the route. The backdrop has supported USD’s safe-haven demand, even as softer expectations for US Federal Reserve rate rises temper dollar strength. In Japan, nominal wages rose 3.2% in May versus a revised 3.6% previously, while real wages increased 1.4% for a fifth month; Household Spending fell 0.4% YoY for a sixth straight decline. Markets now look to FOMC Minutes on Wednesday.
Interest Rate Differentials and Carry Trade Support
We see the current dip in the USD/JPY towards the 161.70 level as a potential buying opportunity rather than a change in trend. The fundamental drivers supporting a weaker yen and a stronger dollar remain firmly in place. Any corrective pullbacks will likely be short-lived unless Japanese authorities take concrete action.
The primary factor is the interest rate differential, which makes the carry trade highly attractive. With the US Fed Funds Rate holding above 5% and the Bank of Japan’s rate near zero, borrowing yen to buy dollars provides a significant yield. This fundamental reality continues to exert downward pressure on the Japanese yen.
However, we must remain vigilant for intervention risk, as the pair is trading far above the 152.00 level that triggered action in 2022. While officials seem to be targeting speculators with words rather than actions, a sudden, sharp move could easily prompt the Ministry of Finance to sell dollars. We are therefore considering using call options to express a bullish view while capping our potential downside risk.
Geopolitical Tensions and Economic Fundamentals
Geopolitical tensions in the Middle East, specifically in the Strait of Hormuz, are adding to the dollar’s safe-haven appeal. Recent disruptions have pushed Brent crude oil prices back towards $90 per barrel, straining Japan’s energy-importing economy and reinforcing dollar strength. This situation makes holding yen less attractive during times of global uncertainty.
Japanese economic data released this week further weakens the case for the yen. While real wages saw a fifth month of growth, the pace slowed, and household spending continues to decline, falling 0.4% in May. This weak domestic picture gives the Bank of Japan very little room to pursue a more aggressive policy tightening path.
In the US, recent inflation data showing core CPI remains sticky around 3.2% suggests the Federal Reserve is in no hurry to cut interest rates. The focus this week will be on the FOMC minutes, which we expect will reinforce a “higher for longer” stance. This outlook should continue to provide underlying support for the US dollar against the yen.
