USD/JPY stayed higher for a third day after gaining over 0.5% on Thursday, trading near 159.60 in Asian hours on Friday. Price action was limited by thin trading during the Good Friday holiday.
The yen remained weak as markets weighed uncertainty over the Bank of Japan’s next steps ahead of its 28 April policy meeting. The BoJ has pointed to a possible rate rise this month, but guidance remains unclear.
BoJ Rate Path In Focus
Reuters reported that a senior BoJ official said rates would keep rising if economic forecasts stay on track. Recent surveys also showed firms facing more pressure from higher fuel costs linked to Middle East tensions.
BoJ Executive Director Koji Nakamura told parliament that higher oil prices may hurt growth. He also said they could raise underlying inflation by lifting long-term inflation expectations.
The US dollar found support from safe-haven demand after US President Donald Trump warned of possible military action over the next two to three weeks. He did not give details on reopening the Strait of Hormuz and issued threats against Iran.
Iran’s Foreign Minister Abbas Araghchi said US strikes on civilian infrastructure would not force Iran to retreat. He described the attacks as showing an opponent in disarray and moral decline.
Yen Intervention Risk Rises
The BoJ targets inflation of around 2%. It used QQE from 2013, added negative rates and 10-year yield control in 2016, then lifted rates in March 2024.
Looking back at the situation in 2025, we see a familiar pattern today on April 3, 2026. The USD/JPY pair is now trading even higher, near 162.50, as the Bank of Japan’s path on future rate hikes remains just as unclear as it was then. This persistent ambiguity from the BoJ continues to weigh heavily on the yen.
The nervousness we observed before the BoJ’s April meeting last year is creating elevated implied volatility in yen options again this month. Given Japan’s latest core CPI reading of 2.5%, which is still above the central bank’s target, the market is pricing in a possibility of another small rate hike. A viable strategy could be buying option straddles to capitalize on a significant price move, regardless of whether the BoJ hikes rates or offers surprisingly dovish guidance.
The fundamental driver is the interest rate differential, which has barely narrowed over the past year. With the US Federal Funds Rate holding firm at 5.50% against Japan’s current policy rate of 0.25%, the carry trade of borrowing yen to buy dollars remains highly profitable. This wide gap continues to provide strong underlying support for the USD/JPY pair.
We must remember the Ministry of Finance’s direct market interventions in late 2022 and again in 2024 to support the yen. With the pair now well above the 160 level that previously triggered official warnings, the risk of sudden, forceful intervention to buy yen is substantially higher than it was this time last year. Holding long USD/JPY positions without some form of downside protection, such as buying puts, is becoming increasingly risky.
Last year, geopolitical tensions involving Iran provided a safe-haven bid for the US dollar. Today, ongoing trade frictions between major economic blocs are fulfilling a similar role, keeping the dollar supported during periods of uncertainty. This external dynamic creates a floor under the currency pair, suggesting that any yen strength from BoJ action could be short-lived.
