Japanese Yen trades with positive bias against USD; seems poised to appreciate further
- The Japanese Yen attracts some dip-buyers and reverses a part of the overnight losses.
- BoJ rate cut bets and growing recession fears drive safe-haven flows towards the JPY.
- A softer USD further contributes to capping USD/JPY’s recovery from a multi-month low.
The Japanese Yen (JPY) edges higher against its American counterpart during the Asian session on Tuesday and for now, seems to have stalled the previous day's sharp retracement from the vicinity of the multi-month peak. Despite growing concerns that harsher US reciprocal tariffs could negatively impact Japan's economy, signs of broadening inflation in Japan keep the door open for further interest rate hikes by the Bank of Japan (BoJ) in 2025. This, in turn, is seen as a key factor that continues to lend support to the JPY.
Furthermore, concerns about the global economic disruptions caused by US President Donald Trump's reciprocal tariffs benefit the JPY's relative safe-haven status. Meanwhile, traders have been pricing in the possibility that a tariffs-driven US economic slowdown might force the Federal Reserve (Fed) to cut interest rates aggressively. This marks a big divergence in comparison to hawkish BoJ expectations, which stalls a two-day-old US Dollar (USD) recovery from a multi-month low and further underpins the lower-yielding JPY.
Japanese Yen attracts some safe-haven flows amid BoJ rate hike bets
- Data released on Monday showed that Nominal Wages in Japan rose 3.1% year-on-year in February compared to the previous month's downwardly revised 1.8% increase. Meanwhile, inflation-adjusted real wages contracted 1.2% in February, marking the second consecutive monthly decline and suggesting that high inflation is weighing on earnings.
- In fact, the consumer inflation rate the government uses to calculate real wages grew 4.3% year-on-year. This comes on top of positive spring wage negotiations – which resulted in an agreement of 5.47% growth on average and offered a positive signal for the domestic economy – and backs the case for further policy normalization by the Bank of Japan.
- Investors remain worried that US President Donald Trump's sweeping reciprocal tariffs will disrupt the global trading system and hit economic activity across the world. Furthermore, Trump upped the ante in his trade war with China and threatened an additional 50% tariff on China if it doesn't withdraw a retaliatory 34% import fee on American products.
- This further fuels worries that steep trade barriers around the world's largest consumer market could lead to a recession, which, in turn, assists the safe-haven Japanese Yen to attract some dip-buyers. The US Dollar, on the other hand, stalls a two-day-old recovery move from a multi-month low amid bets for aggressive interest rate cuts by the Federal Reserve.
- Fed Chair Jerome Powell said on Friday that the US central bank was well positioned to wait for greater clarity before making changes like rate reductions and added that Trump's tariffs could have a strong inflationary impact. Meanwhile, Trump called for the Fed to cut interest rates as soon as possible, arguing that the US economy is in a strong position.
- Moreover, traders are now pricing in a greater possibility that the Fed will resume its rate-cutting cycle in June and deliver at least four rate cuts by the end of this year. This, in turn, would result in the further narrowing of the rate differential between the US and Japan, which suggests that the path of least resistance for the lower-yielding JPY is to the upside.
- There isn't any relevant market-moving economic data due for release from the US on Tuesday, leaving the USD at the mercy of trade-related developments and San Francisco Fed President Mary Daly's scheduled speech. The focus, meanwhile, remains on the release of FOMC meeting minutes on Wednesday and US consumer inflation figures on Thursday.
USD/JPY could resume its downtrend once 147.00 is broken decisively
From a technical perspective, the USD/JPY pair's inability to find acceptance above the 148.00 mark and the subsequent slide warrant caution for bullish traders. Moreover, oscillators on the daily chart are holding in negative territory and are still away from being in the oversold zone, validating the near-term negative outlook for the currency pair. However, a sustained move beyond the Asian session high, around the 148.15 region, might trigger a short-covering rally and lift spot prices to the 148.70 intermediate hurdle en route to the 149.00 round figure. The next relevant barrier is pegged near the 149.35-149.40 region, which if cleared should pave the way for a move towards reclaiming the 150.00 psychological mark.
On the flip side, the 147.00 mark could offer some support, below which the USD/JPY pair could accelerate the slide back towards the 146.00 round figure before dropping to the 145.40 region. Some follow-through selling could make spot prices vulnerable and may weaken further below the 145.00 psychological mark and test the multi-month low, around the 144.55 region, touched on Monday. The subsequent downfall has the potential to drag the currency pair towards the 144.00 mark.
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.