The Japanese yen weakened on Friday, trading lower against major global currencies after Bank of Japan Governor Kazuo Ueda warned of stagflation risks stemming from rising energy costs and subdued growth.
The USD/JPY pair moved close to 159.50 during the European session, extending the yen’s decline as traders interpreted Ueda’s remarks as a signal that meaningful rate hikes remain unlikely in the near term.
Broad underperformance against major peers
Market data showed the yen lagging across the board. It fell 0.19% against the Canadian dollar and 0.15% versus the Australian dollar, while slipping between 0.02% and 0.07% against other major currencies.
The Canadian dollar posted the strongest gains against the Japanese currency, underscoring the appeal of higher-yielding markets at a time when Japanese rates remain near historic lows.
Ueda highlights “negative supply shock” and policy bind
Ueda said inflation pressures from a “negative supply shock” linked to Middle East tensions remain a key challenge for policymakers, stressing that this type of inflation differs from demand-driven price gains and is harder to counter with rate hikes.
He added that higher oil prices could worsen Japan’s terms of trade and weaken growth, lowering the likelihood of imminent monetary tightening. The Bank of Japan’s next policy meeting is scheduled for April 28.
Speaking again from Washington on Thursday, Ueda offered no fresh policy guidance. He reiterated that the conflict in the Middle East is creating both upside risks to prices and downside risks to growth. Following his comments, the yen slipped beyond 159.40 per dollar as traders further reduced expectations for a rate hike at the upcoming meeting.
Mixed data complicate Bank of Japan outlook
The policy debate is playing out against a mixed domestic backdrop. Japan’s annual inflation rate eased to 1.3% in February, the lowest reading since March 2022 and below the Bank of Japan’s 2% target, arguing against rapid tightening.
At the same time, the producer price index rose 2.6% year-on-year in the first quarter, suggesting that firms are still passing on higher wage and input costs. The divergence between softer consumer inflation and firm producer prices adds to uncertainty over the timing and scale of any policy shift.
US–Iran talks temper dollar and shape risk mood
Geopolitics added another layer to currency market sentiment. The United States and Iran prepared for a second round of negotiations, amid a temporary two-week ceasefire that began on April 8 and is due to expire on April 22.
US President Donald Trump said Washington was close to reaching an agreement with Tehran and suggested Iran was more willing to halt nuclear infrastructure projects and surrender enriched uranium, comments seen as supportive of diplomatic progress.
This optimism exerted mild downward pressure on the US dollar, which hovered near a six-week low. However, Tehran has not publicly confirmed that a deal is imminent, and talks held in Islamabad earlier in the week ended without an agreement, keeping the outlook uncertain.
Dollar index near six-week low as markets watch energy, diplomacy
The US Dollar Index was little changed around 98.20, but remained close to 97.83, its lowest level in more than six weeks. Market participants continued to track the negotiations and ceasefire timelines, weighing the potential impact of easing or renewed tensions on global currency moves and energy prices.
Energy markets have already reacted to shifting headlines. West Texas Intermediate crude recently pulled back to around $89 per barrel, helped by news of a separate ceasefire between Israel and Lebanon, which eased some immediate supply concerns.
Carry trade stays attractive, but risks loom
The Bank of Japan’s reluctance to tighten policy keeps the yen-funded carry trade in focus, as traders continue to borrow at low Japanese rates to seek higher returns in other currencies and asset classes. The wide rate gap with other major economies supports this strategy and contributes to ongoing yen weakness.
This environment remains supportive for assets that benefit from ample global liquidity, including risk-sensitive and alternative markets. A recent survey showed 73% of institutional participants plan to increase allocations to digital assets despite volatility.
However, any unexpected hawkish shift from the Bank of Japan or a sharp escalation in geopolitical tensions could trigger a rapid unwinding of carry trades, potentially amplifying moves in both foreign exchange and broader risk markets.
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