USD/JPY traded flat near 159.65 in early Asian dealings on Monday, as markets tracked developments in the US-Iran conflict. The US ISM Services PMI for March is due later on Monday.
Donald Trump said on Sunday that the US would target Iran’s power plants from Tuesday if the Strait of Hormuz remains closed, after US forces rescued an airman whose jet had been shot down. Iran rejected the ultimatum and said it would respond by attacking similar infrastructure owned by, linked to, or related to the US.
Yen Intervention Risks
Traders also watched the chance of Japanese action to support the Yen if weakness continues. Japan’s top currency diplomat, Atsushi Mimura, said last week that officials may take “decisive” steps if speculative moves persist.
The Yen is among the most traded currencies, with its value influenced by Japan’s economic performance, Bank of Japan policy, bond yield gaps, and broader risk sentiment. The BoJ ran ultra-loose policy from 2013 to 2024, which weakened the Yen, while the gradual unwinding of that stance has offered some support.
A wider gap between 10-year US and Japanese bond yields has tended to favour the US Dollar, though the shift in BoJ policy in 2024 and rate cuts elsewhere have narrowed that gap. The Yen is also often treated as a safe-haven during market stress.
Looking back at the situation in early 2025, we saw the USD/JPY exchange rate testing the critical 160 level. This was driven by a combination of geopolitical stress from US-Iran tensions and a wide interest rate gap between the US and Japan. The warnings from the Bank of Japan (BoJ) at that time were a clear signal that the level was seen as unsustainable.
Shifting Policy Divergence
Those warnings were not empty, as we saw significant intervention shortly after that period, reminiscent of the ¥9.79 trillion spent in the spring of 2024 to defend the currency. This history of decisive action has made traders extremely cautious, creating an environment where the risk of a sudden, sharp drop in USD/JPY is always present. Any trader holding long USD/JPY positions must consider this recent precedent.
As of today, April 6, 2026, the fundamental picture has continued to shift against the dollar. The US Federal Reserve has paused its hiking cycle with inflation moderating towards 2.5%, while the BoJ has continued its slow normalization path with two small rate hikes since ending its negative interest rate policy. This has caused the yield spread between US and Japanese 10-year bonds to narrow, reducing the appeal of carry trades that previously favored the dollar.
This environment suggests that implied volatility in USD/JPY options will remain elevated in the coming weeks. Traders should consider buying JPY call options (or USD/JPY put options) to hedge against or profit from another potential sharp appreciation of the yen. Speculative positioning data from the CFTC still shows a significant, though reduced, net short position against the yen, making these positions vulnerable to a squeeze.
While geopolitical flare-ups can cause a temporary flight to the safety of the US dollar, the underlying monetary policy trends are now a headwind for the pair. We should anticipate that any rallies back towards the 155-160 zone will be met with stronger verbal warnings and a higher probability of direct market action from Japanese authorities. Derivative strategies should therefore be biased towards yen strength or, at a minimum, be structured to protect against a rapid downside move in the USD/JPY pair.
