Japanese Yen gains as oil prices fall after US-Iran strike pause

USD/JPY remains subdued for the second successive day, trading around 163.60 during the Asian hours on Monday. The pair depreciates as the Japanese Yen (JPY) receives support from lower oil prices after the United States (US) decision to refrain from striking Iran over the weekend, paired with Tehran suspending its own retaliatory strikes. Japan remains heavily dependent on Middle Eastern oil imports, making its economy particularly sensitive to supply disruptions and swings in crude prices.

Japanese Prime Minister Sanae Takaichi’s approval rating fell in July to its lowest point since she took office last year, driven by rising living costs. The slump intensifies pressure on Takaichi, whose expansionary economic policies have driven up bond yields and pushed the Yen to four-decade lows, according to a Yomiuri newspaper report on Sunday.

The USD/JPY pair loses ground as the US Dollar (USD) falls as risk aversion eases on the brief US-Iran pause, which came after 13 days of escalating conflict. However, market participants remain cautious about potential supply disruptions as Iran-backed Houthis in Yemen claimed responsibility for attacks on Saudi Arabian facilities along the Red Sea.

Reports suggest that the US halted strikes amid growing concerns over depleting interceptor supplies and a shortage of remaining targets within Iran. Additionally, General Dan Caine, Chairman of the Joint Chiefs of Staff, reportedly cautioned President Trump on Friday that continuing the campaign would severely strain critical munitions reserves.

On the policy front, the Fed is widely expected to hold interest rates steady on Wednesday before resuming rate hikes in September, though a minority of market participants still anticipate a surprise move at this week's meeting. The Bank of Japan (BoJ) is also expected to hold rates on Friday.