The Japanese yen strengthened broadly in Asian trading on Friday against a basket of major and minor currencies, extending gains for a second consecutive session against the US dollar after the Japanese government signaled plans to encourage pension funds to increase their holdings of domestic financial assets.

Government data released in Tokyo also showed producer prices rose to their highest level in three years in June, the latest sign of renewed inflationary pressures facing Bank of Japan policymakers, reinforcing expectations of another interest rate hike in October.

The Price

• The US dollar fell 0.65% against the yen to 161.29, from Friday's opening level of 162.35, after reaching an intraday high of 162.42.

• The yen ended Thursday's session up 0.15% against the dollar, marking its first daily gain in five sessions as it continued to recover from its weakest levels in 40 years.

• In addition to bargain buying, the yen also benefited from easing military tensions between the United States and Iran.

Japanese government and pension funds

Japanese Finance Minister Satsuki Katayama said on Friday that the government will explore ways to encourage pension funds, including the Government Pension Investment Fund (GPIF), to increase their investments in domestic financial assets.

Market views and analysis

• Fabian Yeap, market analyst at IG, said: "Pension funds are enormous in size, so you can imagine the impact if there is a structural shift in how they allocate their assets."

• Yeap added: "At the moment, around 50% of their portfolios are allocated to foreign assets. Any change in that allocation would certainly generate larger flows into domestic assets. That would support the yen while also benefiting Japanese equities and bonds."

• He also noted: "With the yen trading near its weakest levels in almost 40 years against the dollar and policymakers having limited options to support the currency, addressing the issue structurally by encouraging greater investment in yen-denominated assets would provide stronger and more sustainable long-term support for the currency."

Japanese government and central bank

Economy Minister Minoru Kiuchi said on Friday that the government will not interfere with the Bank of Japan's decisions on interest rates, emphasizing that monetary policy remains solely the responsibility of the central bank.

Kiuchi added that the government is revising the wording of the monetary policy section in its annual economic plan to avoid any interpretation that it is exerting political pressure on the central bank. The revised plan is expected to receive formal government approval next week.

Japan producer prices

Data released in Tokyo showed that Japan's producer price index rose 7.1% year on year in June, the fastest increase since March 2023, exceeding market expectations of a 6.8% rise and accelerating from a 6.6% increase in May.

Japanese companies have increasingly passed on the higher costs resulting from the conflict in the Middle East to consumers, strengthening expectations that the Bank of Japan could raise interest rates once more before the end of the year.

The data followed a Bank of Japan report released on Thursday warning that the pass-through of higher input costs is accelerating and could push consumer inflation higher later this year.

Japanese interest rates

• Markets continue to price the probability of a 25-basis-point Bank of Japan rate hike at the July meeting at below 25%.

• The probability of a 25-basis-point rate hike at the October meeting has climbed to above 75%.

• Investors are awaiting additional data on inflation, unemployment, and wage growth in Japan to reassess those expectations.

The Nasdaq Composite posted strong gains on Thursday as semiconductor stocks led a rally in US equities, outweighing concerns over renewed exchanges of attacks between the United States and Iran and the inflationary risks stemming from the conflict.

Tehran said it had targeted US military sites in Kuwait, Qatar, and Bahrain in retaliation for US strikes against Iran carried out on Wednesday.

Semiconductor stocks overshadow geopolitical concerns and lift Wall Street

The Philadelphia Semiconductor Index (SOX) gained 3.06%, extending its advance for a second consecutive session, while both the Dow Jones Industrial Average and the S&P 500 also closed higher.

Micron Technology rose 4.5% after announcing plans to invest more than $250 billion in the United States through 2035 to meet growing demand for memory chips used in artificial intelligence applications.

Applied Materials gained 3.2%, while Sandisk surged 7.6%.

Artificial intelligence-related stocks have experienced increased volatility in recent weeks as investors question whether the rally that has driven Wall Street to record highs in 2026 can be sustained.

"This remains an AI-driven bull market," said Ross Mayfield, Investment Strategy Analyst at Baird in Louisville, Kentucky. "The rally had begun broadening into other sectors, but that depends on oil prices and interest rates remaining stable. With the latest escalation in the Middle East, that assumption is now being tested."

Meta Platforms also advanced after Reuters reported that the company plans to begin manufacturing its own artificial intelligence chips starting in September.

The S&P 500 closed up 0.81% at 7,543.66, while the Nasdaq Composite gained 1.30% to 26,206.89. The Dow Jones Industrial Average rose 0.27% to 52,487.41.

Seven of the 11 major S&P 500 sectors finished higher, led by information technology, which gained 1.65%, followed by consumer discretionary, up 1.46%.

Following Thursday's gains, the S&P 500 is now up about 10% since the start of 2026 and stands less than 1% below its record closing high reached on June 2.

Investors remain cautious ahead of earnings season and Fed meetings

With the second-quarter earnings season approaching, analysts surveyed by LSEG I/B/E/S expect S&P 500 companies to report annual earnings growth of 24%, with technology companies accounting for the largest share of that increase.

The index is currently trading at a forward price-to-earnings ratio of around 20, compared with roughly 21 a month ago.

On the economic front, the number of Americans filing new unemployment claims declined last week, pointing to continued resilience in the labor market despite slower job growth in June.

The Federal Reserve kept interest rates unchanged at its June meeting under Chair Kevin Warsh. However, minutes released on Wednesday showed that a small number of policymakers saw a case for raising borrowing costs before the committee ultimately agreed to leave rates unchanged.

According to CME Group's FedWatch tool, markets are currently pricing in a 25-basis-point interest rate hike by the December meeting.

Among individual stocks, PepsiCo fell 3.3% despite reporting quarterly revenue that exceeded analysts' expectations.

Costco Wholesale dropped 4.2% to its lowest level in six months after reporting slower growth in comparable sales during June.

Advancing stocks outnumbered decliners within the S&P 500 by a ratio of 1.5-to-1. Total trading volume on US exchanges reached approximately 14.7 billion shares, compared with the 20-session average of 22.9 billion.

Ripple's XRP showed signs of a modest recovery, trading near $1.10 during Thursday's session as uncertainty continued to weigh on the cryptocurrency market following renewed tensions in the Middle East.

US-Iran tensions weigh on crypto market despite improving derivatives demand

Geopolitical pressures intensified after the US military announced late Wednesday that it had carried out strikes targeting 90 locations along Iran's coastline.

Iran's Revolutionary Guard responded by launching attacks against US military bases in Kuwait and Bahrain.

Despite the escalation, Qatar's prime minister called on both Iran and the United States to continue diplomatic dialogue, according to Reuters.

Retail interest improves modestly while institutional investors remain cautious

XRP continued to attract limited retail demand in the derivatives market, with CoinGlass data showing that open interest in perpetual futures remained stable at around 2.14 billion XRP on Thursday.

The data also showed that open interest had increased from 2.09 billion XRP recorded on Tuesday, a trend that could support the current recovery if retail demand continues to strengthen.

Institutional investors, however, remain more cautious. That was reflected in spot XRP ETF data, which showed net outflows of approximately $7 billion on Wednesday following subdued activity on Monday and Tuesday.

The New Zealand dollar, known as the kiwi, rose on Thursday to its highest level in more than two weeks after strong manufacturing data reinforced investor expectations that New Zealand will continue tightening monetary policy.

Strong industrial data and hawkish central bank stance support the kiwi

The data showed that New Zealand's manufacturing sector expanded last month at its fastest pace in nearly five years, while Reserve Bank of New Zealand Governor Anna Breman said the economy was growing more strongly than expected after the central bank raised interest rates this week.

In trading, NZD/USD hovered near 0.5730, up about 0.56%, as the New Zealand currency continued to draw support from the RBNZ's decision, which was more hawkish than markets had expected.

As widely expected, the central bank raised the official cash rate by 25 basis points to 2.5% at its July meeting. More importantly for markets, however, it signaled that further withdrawal of monetary stimulus may be necessary to ensure inflation returns sustainably to target.

The bank's forecasts show inflation peaking at 3.9% in the second quarter before gradually easing toward 2%, the midpoint of the target range, by mid-2027.

DBS noted that the Monetary Policy Committee's unanimous vote in favor of the rate hike marked a notable shift from the May meeting, when views were divided, and reflected the central bank's renewed commitment to fighting inflationary pressures.

Weak Chinese inflation and geopolitical tensions limit gains

Despite the positive momentum, the latest economic data from China limited the New Zealand dollar's gains, given that China is New Zealand's largest trading partner.

China's National Bureau of Statistics said the consumer price index rose 1% year on year in June, down from 1.2% in the previous month and below market expectations of 1.1%.

On a monthly basis, inflation fell 0.3%, a larger decline than expected, reflecting continued weakness in price pressures across the Chinese economy.

Meanwhile, the US dollar continued to draw support from escalating geopolitical tensions, as relations between the United States and Iran deteriorated further for a second consecutive day, with both sides exchanging fresh threats.

The worsening geopolitical backdrop increased demand for safe-haven assets, which could limit further gains in NZD/USD in the near term.