Tokyo’s request for a reduction in the tariffs imposed by Washington has led to tensions between the two nations. Donald Trump threatened to raise tariffs to 35% but ultimately limited them to 25%. As a result, the USDJPY pair surged. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Japan has been hit with higher tariffs from the US.
- Parliamentary elections are putting pressure on the yen.
- Tokyo should show flexibility in negotiations.
- Long trades on the USDJPY pair can be considered if the price pierces 146.5.
Weekly Fundamental Forecast for Yen
The markets are constantly evolving, and the same event can elicit varied responses over time. Following the Liberation Day in the US, the Japanese yen outperformed the US dollar, gaining the status of a primary safe-haven asset and strengthening against major world currencies. However, Donald Trump’s tariff letters put significant pressure on the currency. The US has raised import duties from 24% to 25% for Japan, which has pushed the USDJPY pair higher.
US Tariffs in April and July
Source: Wall Street Journal.
In the first half of the year, the pair fell due to divergent monetary policies and investors seeking refuge in safe havens. However, in July, trade and political risks became a key concern, creating conditions for a downward correction in USDJPY quotes.
Parliamentary elections are scheduled to take place in Japan on July 20, and the recent announcement of tariffs by President Donald Trump represents a political challenge for Prime Minister Shigeru Ishiba. The Liberal Democratic Party (LDP) is losing popularity as the cost of living rises, and high inflation is leading to a decline in real wages over a long period of time.
Japan’s Average Monthly Real Cash Earnings YoY
Source: Bloomberg.
The 25% US tariffs have had a significant impact on Japan’s export-oriented economy. Moreover, they can trigger a recession. In the context of pre-election pledges to reduce taxes and augment budgetary spending, there is a possibility of a substantial increase in the deficit and public debt, leading to short-lived turmoil in the Japanese bond market and increased pressure on the yen.
Japan should acknowledge that its attempts to force a change through confrontation will not yield positive results. It is ill-advised to persistently insist on a reduction in tariffs, as this could have disastrous consequences. Donald Trump previously indicated his intention to raise import duties to 35%, but has since limited them to 25%. However, even a 1% increase since April suggests that the US president is displeased with the progress of negotiations with Japan. If the country adopts a more flexible approach to trade talks with the US, the downward trend in the USDJPY pair may begin.
It is challenging to engage in dialogue with Donald Trump. Previously, the US leader had made a commitment to reduce tariffs if Japanese companies were to establish production facilities in the US. However, Nippon Steel’s plan to invest $1 trillion in an industrial complex in Arizona, with the aim of producing robots and AI systems, did not prevent the US president from pursuing his agenda.
Weekly USDJPY and EURJPY Trading Plan
The resumption of trade wars and the approaching parliamentary elections in Japan will likely trigger a correction in the yen. The Japanese currency appears to be weak, making it advantageous to purchase the EURJPY pair with a target of 174. The trajectory of the USDJPY pair will depend on whether the quotes manage to break through the 146.5 level. If the pair pierces this level, it may surge to 147.7 and 149.2.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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