Japanese Yen consolidates in a range against USD, bullish potential seems intact
- The Japanese Yen snaps a two-day losing streak against the USD and recovers further from the weekly low.
- Concerns about Trump’s trade tariffs and hawkish BoJ expectations continue to act as a tailwind for the JPY.
- Fed rate cut bets keep the USD close to a multi-month low and contribute to capping the upside for USD/JPY.
The Japanese Yen (JPY) oscillates in a narrow range against its American counterpart during the Asian session on Thursday amid mixed fundamental cues. Investors remain worried that US President Donald Trump could impose fresh tariffs on Japan. This, along with a generally positive risk tone, undermines the safe-haven JPY. However, the chaotic implementation of Trump’s tariffs and their impact on the global economy might offer some support to the JPY. Furthermore, rising bets that the Bank of Japan (BoJ) will continue raising interest rates amid broadening inflation in Japan contribute to limiting the downside for the JPY.
Meanwhile, hawkish BoJ expectations keep the Japanese government bond (JGB) yields elevated near a multi-year high. The resultant narrowing of the rate differential between Japan and other countries turns out to be another factor acting as a tailwind for the lower-yielding JPY. The US Dollar (USD), on the other hand, hangs near a multi-month low amid expectations that the Federal Reserve (Fed) will cut rates several times this year. This, in turn, fails to assist the USD/JPY pair to capitalize on a modest recovery from a multi-month low touched on Tuesday. Traders now look to the US Producer Price Index (PPI) for a fresh impetus.
Japanese Yen bulls have the upper hand amid hawkish BoJ expectations, trade war fears
- US President Donald Trump’s 25% tariff on all steel and aluminum imports took effect on Wednesday. Trump also threatened that he would respond to any countermeasures announced by the European Union and Canada.
- Trump repeated his warning to reveal “reciprocal” tariffs next month on countries around the world, fueling concerns about a further escalation of a trade war and lending support to the traditionally safe-haven Japanese Yen.
- Japanese firms agreed to significant wage hikes for the third straight year to help workers cope with inflation and address labour shortages. Higher wages are expected to boost consumer spending and contribute to rising inflation.
- This potential gives the Bank of Japan more room for additional interest rate hikes this year. This, in turn, keeps the yield on the 10-year Japanese government bond close to its highest levels since the 2008 Global Financial Crisis.
- Meanwhile, BOJ Governor Kazuo Ueda signaled that they have no immediate plans to intervene in the bond market, and said that it is natural for long-term rates to move in a way that reflects the market’s outlook for the policy rate.
- Traders ramp up their bets that the Federal Reserve will have to lower interest rates this year by more than expected amid the rising possibility of an economic downturn on the back of the Trump administration’s aggressive policies.
- The expectations were reaffirmed by data released on Wednesday, which showed that the headline US Consumer Price Index (CPI) rose less than expected, by 2.8% on a yearly basis in February, down from 3% in the previous month.
- Additional details of the report revealed that the core CPI, which excludes volatile food and energy prices, eased from the 3.3% increase in January to the 3.1% YoY rate during the reported month. The reading was below the 3.2% anticipated.
- Traders now look forward to the release of the US Producer Price Index (PPI) for a fresh impetus later during the early North American session. The fundamental backdrop, however, seems tilted in favor of the USD/JPY bears.
USD/JPY holds above the 148.00 mark immedaite support; not out of the wood yet
From a technical perspective, the overnight failure to find acceptance above the 149.00 round-figure mark and the subsequent pullback validate the negative outlook for the USD/JPY pair. Moreover, oscillators on the daily chart are holding deep in bearish territory and are still away from being in the oversold zone. This, in turn, suggests that the path of least resistance for spot prices remains to the downside. Hence, some follow-through selling below the 148.00 mark could expose the next relevant support near the 147.25-147.20 region before the pair slides further below the 147.00 mark, towards retesting the multi-month low, around the 146.55-146.50 area touched on Tuesday.
On the flip side, the 148.60-148.70 zone now seems to act as an immediate hurdle ahead of the 149.00 mark and the overnight swing high, around the 149.20 region. A sustained strength beyond the latter might prompt a short-covering rally and allow the USD/JPY pair to reclaim the 150.00 psychological mark. The momentum could extend further towards the 150.55-150.60 horizontal barrier en route to the 151.00 round figure and the monthly swing high, around the 151.30 area.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
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