EBC Markets Briefing | Yen dropped on Middle East escalation

The yen inched down on Monday as safe-haven buying pushed up the dollar on fears the Israel-Iran fighting could escalate into a broader regional conflict Suring energy prices bode ill for Japan's economy.

The BOJ will forego another interest rate hike this year due to uncertainty over US tariff policy, according to a slight majority of economists in a Reuters poll who expect the next 25-bp increase in early 2026.

The central bank is still pushing for tighter monetary conditions, contrasting with its peers. Governor Kazuo Ueda stressing the readiness to stand pat if underlying inflation approaches its 2% target.

Interest rate futures are only pricing in about 17 bps more of tightening by year-end. Yields on super-long JGBs rose to record levels last month due to dwindling demand from traditional buyers

PM Shigeru Ishiba heads to Canada on Sunday for trade talks with Trump, hoping to persuade him to drop trade tariffs that have imperilled Japan's carmakers and threaten to undermine his fragile government.

Cars and their parts account for a third of Japan's export to the US. Analysts see Tokyo's best scenario in the negotiations as getting the auto tariffs down to 10%, which would ease the pain.

The yen has been weaker since Israel's assault surprised. The falling wedge pattern signals that the downtrend will continue in the near future with resistance at 143.90 per dollar.

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