The Japanese yen weakened against a basket of major currencies during Asian trading on Thursday, moving back into negative territory against the US dollar and remaining close to its weakest level in 40 years. The decline came as demand for the US dollar strengthened on renewed safe-haven buying following the latest military strikes exchanged between the United States and Iran.

Later today, the Bank of Japan will begin its fifth monetary policy meeting of 2026, with the policy decision scheduled for Friday. Markets widely expect the central bank to leave interest rates unchanged while providing further guidance on the path of monetary policy normalization for the remainder of the year.

The Price

The US dollar rose 0.1% against the Japanese yen to 163.55, up from Thursday's opening level of 163.39. The session low stood at 163.21.

The yen closed Wednesday's session about 0.3% higher against the US dollar, marking its second gain in the past three sessions as it recovered from a fresh 40-year low of 163.99.

US dollar

The US Dollar Index rose 0.15% on Thursday, rebounding from a one-week low as the greenback strengthened against a basket of major and minor currencies.

The rebound was driven by renewed safe-haven demand for the US dollar as military exchanges between the United States and Iran intensified, raising concerns that the conflict could spread further across the Middle East.

Latest developments in the Iran conflict

Military hostilities resumed after the United States launched a new wave of airstrikes lasting around two hours and targeting dozens of Islamic Revolutionary Guard Corps positions.

The US strikes came in response to an Iranian ballistic missile attack targeting American military bases in Jordan.

Iran confirmed that it had targeted US bases in Jordan and said it would continue responding to any attacks against its territory.

The conflict expanded geographically after a US-owned gas tanker was targeted at Egypt's Damietta Port.

Regional tensions escalated further as joint US and Saudi strikes against Iran-backed groups in Iraq continued, increasing concerns that the confrontation could spread to additional fronts.

Diplomatic efforts remain stalled, with negotiations over de-escalation and the future of navigation through the Strait of Hormuz still at an impasse, reducing the likelihood of a new ceasefire in the near term.

Bank of Japan

The Bank of Japan begins its fifth monetary policy meeting of 2026 later today, with its decision due on Friday. The central bank is widely expected to keep its benchmark interest rate unchanged at 1%, the highest level since 1995.

Markets will closely watch the BOJ's statement for further indications that policymakers remain committed to raising interest rates in the coming months to address inflationary pressures linked to the conflict in the Middle East.

Outlook for the Japanese yen

At Economies.com, we expect that with no change in interest rates anticipated, the Bank of Japan will need to adopt a relatively hawkish tone to reinforce its commitment to supporting the yen and achieving its inflation target.

Until the outcome of the BOJ meeting is announced, we expect the yen to remain volatile near its weakest levels in four decades against the US dollar. A stronger recovery is possible if the central bank clearly signals the door remains open for a rate hike at its September meeting.