- The Japanese Yen continues losing ground amid worries about the economic impact of US tariffs.
- Domestic political uncertainty further undermines the JPY amid reduced BoJ rate hike bets.
- Diminishing odds for early Fed rate cuts act as a tailwind for the US Dollar and the USD/JPY pair.
The Japanese Yen (JPY) maintains its offered tone through the Asian session on Wednesday, which, along with a broadly firmer US Dollar (USD), assists the USD/JPY pair to stick to intraday gains near the 147.00 round figure. Concerns about the economic fallout from US President Donald Trump’s 25% tariffs from a new deadline of August 1 on Japanese goods undermine the JPY. Furthermore, expectations that trade tensions could create pressure on the Bank of Japan (BoJ) to forgo raising interest rates this year turn out to be another factor driving flows away from the JPY amid domestic political uncertainty.
In fact, recent media polls have shown that the Liberal Democratic Party (LDP) and its junior ruling coalition partner Komeito may fail to secure a majority at the July 20 House of Councillors election. This could complicate trade negotiations and also heighten both fiscal and political risks in Japan, which favors the JPY bears. Furthermore, the recent US Dollar (USD) strength, bolstered by expectations that higher tariffs would underpin the US inflation and force the Federal Reserve (Fed) to hold off cutting interest rates, suggests that the path of least resistance for the USD/JPY pair is to the upside.
Japanese Yen maintains its offered tone as investors pare BoJ rate hike bets amid trade jitters
- US President Donald Trump announced a 25% tariff on Japanese goods effective August 1 and warned that any retaliatory levies would draw a like-for-like response. Japanese Prime Minister Shigeru Ishiba said on Tuesday that bilateral talks would continue towards seeking a mutually beneficial trade deal.
- Nevertheless, trade tensions add to woes for Japan’s economy, which shrank in the first quarter on soft consumption. Adding to this, Japan’s real wages in May fell at the fastest pace in 20 months. This backs the case for the Bank of Japan’s caution in the near term, which is seen undermining the Japanese Yen.
- Recent surveys raised doubts about whether the ruling coalition of the Liberal Democratic Party (LDP) and Komeito will be able to secure enough seats in the upcoming House of Councillors election on July 20 to maintain their majority. This adds a layer of uncertainty and contributes to the JPY’s downfall.
- The US Dollar, on the other hand, shot to a two-week high on Tuesday amid expectations that the Federal Reserve would keep interest rates elevated in anticipation of worsening inflation as a result of higher import taxes and a resilient US labor market. This lends additional support to the USD/JPY pair.
- The USD bulls, however, seem reluctant and opt to wait for more cues about the Fed’s policy outlook before placing fresh bets. According to the CME Group’s FedWatch tool, market participants are currently pricing in around 50 basis points of Fed rate cuts by the end of this year, starting in October.
- Hence, the focus remains glued to the release of FOMC meeting minutes, due later during the US session on Wednesday. Investors will look for fresh cues about the Fed’s rate-cut path, which, in turn, will influence the USD price dynamics and provide a fresh impetus to the USD/JPY pair.
USD/JPY seems poised to climb further while above 100-day SMA resistance breakpoint
The USD/JPY pair’s overnight close above the 100-day Simple Moving Average (SMA) for the first time since February could be seen as a fresh trigger for bullish traders. Moreover, oscillators on the daily chart have been gaining positive traction and are still far from being in the overbought zone. The technical setup backs the case for a further near-term appreciating move towards the 147.60-147.65 intermediate hurdle en route to the 148.00 round figure, or the June monthly swing high.
On the flip side, the Asian session low, around the 146.50 area, now seems to protect the immediate downside. Any further corrective slide could be seen as a buying opportunity and remain limited near the 100-day SMA resistance breakpoint, currently pegged just below the 146.00 round figure. The latter should act as a key pivotal point, which if broken decisively might shift the near-term bias in favor of bearish traders and pave the way for some meaningful downside.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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