Japanese Yen trades with mild negative bias against USD; bears lack conviction

The Japanese Yen is undermined by receding safe-haven demand, though it lacks follow-through.
The BoJ rate hike bets should limit any meaningful JPY downfall amid persistent geopolitical risks.
Dovish Fed expectations keep the USD bulls on the defensive and cap gains for the USD/JPY pair.

The Japanese (JPY) weakens across the board on Tuesday, assisting the USD/JPY pair to reverse the previous day's slide to over a one-week low and climb back to mid-145.00s during the Asian session. A surprise downgrade of the US government's credit rating on Friday appeared to have a modest impact on the global risk sentiment. This is evident from a generally positive tone around the equity markets, which is seen as a key factor undermining demand for the safe-haven JPY.

Any meaningful JPY downfall, however, seems elusive in the wake of the growing acceptance that the Bank of Japan (BoJ) will raise interest rates again in 2025. In contrast, the Federal Reserve (Fed) is expected to lower borrowing costs further amid signs of easing inflationary pressures and a sluggish growth outlook. This, in turn, might keep a lid on any attempted US Dollar (USD) move higher and act as a tailwind for the lower-yielding JPY, which, in turn, should cap the USD/JPY pair.

Japanese Yen bulls turn cautious amid the upbeat market mood; downside potential seems limited

Investors looked past Moody's downgrade of the US sovereign credit rating to “Aa1” from “Aaa” on Friday amid rising trade optimism, which, in turn, prompts fresh selling around the safe-haven Japanese Yen during the Asian session on Tuesday.
The US and China agreed to significantly lower tariffs and initiated a 90-day pause to finalize a broader deal, which marked the de-escalation of a disruptive standoff between the world's two largest economies and boosted the global risk sentiment.
Bank of Japan Deputy Governor Shinichi Uchida said on Monday that Japan's underlying inflation is likely to re-accelerate after a period of slowdown and that the central bank will keep raising interest rates if the economy, prices improve as projected.
Moreover, the BoJ's Summary of Opinions from the last meeting revealed that policymakers haven't given up on hiking interest rates further, and some board members saw scope to resume rate hikes if developments over US tariffs stabilise.
The US Consumer Price Index (CPI) and the Producer Price Index (PPI) released last week pointed to signs of easing inflation, while the disappointing US monthly Retail Sales data increased the likelihood of several quarters of sluggish growth.
Two Fed officials –New York Fed President John Williams and Atlanta Fed President Raphael Bostic – suggested on Monday that policymakers may not lower interest rates before September on the back of a murky economic outlook.
Moreover, Fed Vice Chair Philip Jefferson also backed a wait-and-see approach and warned against temporary price increases becoming sustained inflation. Investors, however, are still pricing in two 25-basis-point rate cuts by the year-end.
Trump announced on his Truth Social platform that Russia and Ukraine have agreed to start negotiations towards a ceasefire immediately and stressed that the conditions of the bilateral talks will be negotiated between the two parties directly.
The Israeli military announced that it had begun extensive ground operations in an expanded offensive against Hamas and issued evacuation orders to people in the southern city of Khan Yunis – the second-largest city in Gaza.
This keeps geopolitical risks in play and should limit any meaningful JPY depreciation, warranting caution before placing fresh bullish bets around the USD/JPY pair and confirming that a one-week-old downtrend has run its course.

USD/JPY is likely to attract fresh sellers at higher levels and remain capped near the 146.00 mark

From a technical perspective, acceptance below the 38.2% Fibonacci (Fibo.) retracement level of the April-May upward move and negative oscillators on hourly charts favor the USD/JPY bears. Hence, any subsequent move up might still be seen as a selling opportunity and remain capped ahead of the 146.00 round figure. A sustained strength beyond the latter, however, might trigger a short-covering move and lift spot prices to the 146.60 area, or the 23.6% Fibo. level, en route to the 147.00 mark.

On the flip side, the 144.65 area, or over a one-week low touched on Monday, now seems to protect the immediate downside. This is closely followed by the 144.30-144.25 confluence, comprising the 200-period Simple Moving Average (SMA) on the 4-hour chart and the 50% retracement level. A convincing break below will be seen as a fresh trigger for bearish traders and drag the USD/JPY pair below the 144.00 mark, towards the next relevant support near the 143.75-143.70 region.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese 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.

How does broader risk sentiment impact the Japanese Yen?

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.