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The dollar/yen pair climbed on Tuesday, buoyed by a stronger U.S. dollar, which gained from a sharp decline in risk appetite across global financial markets as fighting between Iran and Israel persisted.
The Bank of Japan (BoJ) maintained its interest rate at 0.5%, aligning with market expectations and resulting in a stable USD/JPY exchange rate around ¥144.50, with minimal yen movement. The BoJ outlined its ongoing plan to reduce bond purchases, continuing with ¥400 billion quarterly cuts through March 2026, followed by ¥200 billion reductions per quarter until March 2027, aiming for a monthly purchase level of approximately ¥2 trillion to improve market functioning without triggering disruptions.
Japan’s economy faces challenges, with inflation at 3.6% in April 2025, exceeding the BoJ’s 2% target for over three years due to domestic rice shortages and rising import costs, while GDP contracted by 0.2% in Q1 2025, driven by trade tensions, weak corporate profits, and declining exports. The BoJ emphasized a cautious approach to tightening, prioritizing economic stability and maintaining accommodative financial conditions to support growth. These factors—persistent inflation, slowing GDP, and gradual bond tapering—will likely shape the yen’s trajectory through the second half of 2025.
The war between the two sides entered its fifth day, taking on a new form of mutual violence and military confrontation. Iran announced strikes on sensitive sites, while Israel reported conducting operations inside Iran. Iran bombed an intelligence headquarters in Israel, while Israel claimed it killed Iran’s newly appointed army chief of staff just four days after his appointment.
There are no signs of de-escalation in the military clashes between the two parties, pushing financial markets to retreat and adopt an extremely cautious approach. Residents of Tehran continue to flee the capital amid fears of further Israeli attacks on its outskirts. The violence in the Middle East has crushed risk appetite.
