Japanese Yen bulls retain control amid hawkish BoJ expectations, safe-haven buying
- The Japanese Yen scales higher against a weaker USD for the third straight day on Monday.
- The divergent BoJ-Fed policy expectations and reviving safe-haven demand benefited the JPY.
- Hopes for a US-Japan trade deal further support the JPY and weigh on the USD/JPY pair.
The Japanese Yen (JPY) remains on the front foot against its American counterpart for the third consecutive day on Monday and seems poised to strengthen further amid a combination of supporting factors. The Tokyo Consumer Price Index (CPI) released on Friday indicated that core inflation accelerated more than expected in May and reaffirmed bets that the Bank of Japan (BoJ) will continue raising interest rates. Furthermore, persistent trade-related uncertainties and geopolitical risks turn out to be key factors underpinning the safe-haven JPY.
Meanwhile, comments from Japan’s top trade negotiator Ryosei Akazawa suggested progress in trade talks with the US and fueled hopes for an imminent deal as early as this month, which, in turn, lends additional support to the JPY. The US Dollar (USD), on the other hand, attracts fresh sellers on the back of the growing acceptance that the Federal Reserve (Fed) will lower borrowing costs further amid signs of easing inflation. This further benefits the lower-yielding JPY and drags the USD/JPY pair below mid-143.00s during the Asian session.
Japanese Yen is underpinned by a combination of supporting factors; seems poised to appreciate further
- The Tokyo Consumer Price Index (CPI) has exceeded the Bank of Japan's 2% target for three straight years and pointed to sticky food inflation on Friday. This could add pressure on the BoJ to hike interest rates again, which continues to underpin demand for the Japanese Yen.,
- Japan’s top trade negotiator Ryosei Akazawa said the latest round of discussions with the Trump administration on tariffs have put them on track toward a trade deal as early as this month. Akazawa added that the two sides will meet again before the Group of Seven leaders’ summit.
- US President Donald Trump said on Friday that he is going to double tariffs on steel imports from 25% to 50%. Earlier Trump lashed out at China, saying that China had violated its trade deal with the US. The escalation comes after a federal appeals court reinstated Trump's tariffs.
- Ukraine on Sunday launched one of its largest drone attacks on Russia, striking five air bases deep inside Russian territory and destroying more than 40 planes. Meanwhile, Russia pounded Ukraine with missiles and drones just hours before a new round of direct peace talks in Istanbul.
- Israel continued its relentless bombardment of the Gaza Strip, while Yemen’s Houthi rebels claimed responsibility for a ballistic missile attack, which was intercepted, on Ben Gurion Airport near Tel Aviv. This keeps geopolitical risks in play and benefits the safe-haven JPY.
- Meanwhile, the US Personal Consumption Expenditure (PCE) Price Index cooled to a 2.1% YoY rate in April from 2.3% in the previous month. Moreover, the core PCE Price Index, which excludes volatile food and energy prices, rose 2.5% compared to 2.7% in March.
- The data reaffirmed expectations that the Fed will cut its target for short-term borrowing costs in September. Traders are also pricing in the possibility of a second rate cut in December. This prompts fresh US Dollar selling and further exerts pressure on the USD/JPY pair.
- Investors now look forward to this week's important US macro releases scheduled at the beginning of a new month, starting with the ISM Manufacturing PMI later this Monday. Apart from this, Fed Chair Jerome Powell's appearance will be looked upon for short-term impetuses.
USD/JPY could extend the downward trajectory further below the 143.00 mark amid a bearish technical setup
Last week's failure near the 61.8% Fibonacci retracement level of the recent downfall from the monthly peak and a subsequent fall below the 200-period Simple Moving Average (SMA) on the 4-hour chart favors the USD/JPY bears. This, along with negative oscillators on daily/hourly charts, suggests that the path of least resistance for spot prices remains to the downside and supports prospects for deeper losses. Hence, some follow-through weakness towards the 143.00 mark, en route to the next relevant support near the 142.40 area, looks like a distinct possibility. The pair could eventually drop to the 142.10 area, or the monthly low touched last Tuesday.
On the flip side, the 200-period SMA on the 4-hour chart, currently pegged just ahead of the 144.00 round figure, might now act as an immediate strong barrier. This is closely followed by the 144.25-144.30 supply zone, above which the USD/JPY pair could aim to reclaim the 145.00 psychological mark. A sustained strength beyond the latter should pave the way for a move towards the 145.65 horizontal zone en route to the 146.00 round figure and the 146.25-146.30 region, or a two-week top touched last Thursday.
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.