USD/JPY edged up from an over one-week low near 158.45 in Asian trading on Wednesday, but remained below 159.00 and was nearly flat on the day. Trading stayed cautious as markets weighed reports about a possible US exit from the Iran war and awaited further geopolitical news.
President Donald Trump said on Tuesday that the US would wind down hostilities with Iran within two to three weeks, and that Tehran does not need a deal with Washington to end the conflict. This lifted risk appetite and eased demand for the US Dollar, limiting USD/JPY upside.
Bank Of Japan Tankan Survey
Japan’s Bank of Japan tankan survey showed improved sentiment among large manufacturers over the three months to March, with the index rising to 17. This was the fourth consecutive quarterly increase and the highest level since December 2021, supporting the yen and capping the pair.
A BoJ official said the survey likely did not fully reflect the Middle East conflict, while reports said the UAE is pushing for military action to reopen the Strait of Hormuz. Japan’s reliance on Middle East oil imports has raised concerns about economic strain, which could weigh on the yen.
Traders are now watching upcoming US data, including the ADP report and the ISM Manufacturing PMI.
Looking back from our current date of April 1, 2026, the mixed signals from early 2025 presented a complex picture. The hope then was that a de-escalation in the Middle East would weaken the US Dollar, while a strong Tankan survey would boost the Yen. This created a bearish consolidation for USD/JPY right below the 159.00 level.
What Happened Next
That optimism proved to be short-lived, as we now know the US withdrawal from Iran did not de-escalate the regional conflict. The subsequent tensions surrounding the Strait of Hormuz caused WTI crude futures to spend most of late 2025 above $95 a barrel, putting immense pressure on Japan’s energy-importing economy. As a BoJ official had worried, this impact eventually surfaced in later Tankan surveys, with business confidence falling through the second half of 2025.
On the other side of the pair, the US Dollar’s weakness never materialized due to a resilient domestic economy. Persistent inflation, with the recent March 2026 CPI print coming in at a stubborn 3.1% year-over-year, has kept the Federal Reserve from cutting interest rates. This continued rate differential between the US and Japan has been the primary driver pushing the currency pair higher.
As a result, we have seen USD/JPY surge from the 159.00 level of a year ago to its current trading range around 168.50. This sharp ascent has brought the very real threat of direct intervention by Japanese authorities back into focus. We note that Japan’s foreign exchange reserves, last reported at over $1.2 trillion, give them significant firepower for such an action.
This elevated risk of a sudden, sharp move makes simple directional trades incredibly risky in the coming weeks. The primary play here is on volatility, as intervention could cause a 500-pip drop in minutes, while a failure to act could see the pair test the 170.00 psychological barrier. We should therefore be positioning in long volatility strategies.
Buying options is the most direct way to prepare for a significant price swing without being exposed to the direction. A long straddle, which involves buying both a call and a put option at the same strike price, is an appropriate strategy. This position will profit from a large move in either direction, capitalizing on the market’s current uncertainty.
