- The Japanese Yen continues with its relative outperformance against a weaker USD.
- Signs of broadening inflation in Japan reaffirm BoJ rate hike bets and benefit the JPY.
- The USD hangs near a one-week low amid Fed rate cut expectations and caps USD/JPY.
The Japanese Yen (JPY) oscillates in a range against its American counterpart during the Asian session on Wednesday amid mixed cues, though the fundamental backdrop favors bullish traders. The Israel-Iran ceasefire optimism remains supportive of the upbeat market mood and acts as a headwind for traditional safe-haven assets. Moreover, the Summary of Opinions from the Bank of Japan’s (BoJ) June meeting showed that some policymakers called for keeping interest rates steady for the time being, due to uncertainty over the impact of US tariffs on Japan’s economy, and caps the JPY.
Investors, however, seem convinced that the BoJ will hike interest rates again amid the broadening inflationary pressures in Japan. The bets were reaffirmed by Japan’s Services Producer Price Index (PPI), which rose for the third straight month and remained above the 3% YoY rate in May. This continues to support the JPY and keeps the USD/JPY pair below the 145.00 mark amid a weaker US Dollar (USD), amid bets that the Federal Reserve (Fed) would lower borrowing costs further this year. The divergent BoJ-Fed policy expectations validate the positive outlook for the lower-yielding JPY.
Japanese Yen bulls turn cautious amid mixed cues; downside potential seems limited
- The Bank of Japan published the Summary of Opinions from the June monetary policy meeting earlier this Wednesday, which revealed that several board members warned of the expected hit to Japan’s fragile economy from sweeping US tariffs. Some policymakers said that consumer inflation was moving at higher-than-expected levels, partly due to surging prices of the staple rice.
- In fact, data released last week showed that Japan’s annual National Consumer Price Index (CPI) rose by 3.5% YoY in May and remained above the BoJ’s 2% target. Further details revealed that the National core CPI – excluding volatile fresh food prices – shot to the highest level since January 2023, while a core gauge that excludes both fresh food and energy prices climbed 3.3% YoY in May.
- Adding to this, Japan’s Services Producer Price Index, released earlier this Wednesday, increased 3.3% YoY in May, slightly lower than the previous month’s upwardly revised reading of 3.4%. The Services PPI is a key gauge of domestic inflation pressures and back-to-back readings above the 3% mark keep alive market expectations for further interest rate hikes by the central bank.
- Meanwhile, Federal Reserve Chair Jerome Powell, in his prepared remarks for the Semiannual Monetary Policy Report to Congress, said that the central bank expects inflation to start rising soon and is in no rush to ease borrowing costs. Powell’s remarks come after his colleagues recently suggested a rate cut at the July policy meeting, though it does little to impress the US Dollar bulls.
- The Israel-Iran ceasefire came into effect on Tuesday and appeared to hold for now, despite an Israeli attack on Tehran and an Iranian missile strike. Both Iran and Israel have claimed victory in the war and warned they were ready to renew hostilities if the other attacks. This keeps geopolitical risks in play and benefits the safe-haven Japanese Yen amid the divergent BoJ-Fed expectations.
USD/JPY remains vulnerable amid a breakdown and acceptance below 200-hour SMA
From a technical perspective, the overnight decline below the 145.35-145.25 resistance-turned-support and acceptance below the 200-hour Simple Moving Average (SMA) was seen as a key trigger for the USD/JPY bears. Moreover, oscillators on the daily chart have just started gaining negative traction and validate the near-term negative outlook for the currency pair. Some follow-through selling below mid-144.00s, or the overnight trough, should pave the way for a slide towards the 144.00 round figure en route to the 143.70-143.65 region before spot prices aim to test sub-143.00 levels.
On the flip side, any attempted recovery might now attract fresh sellers near the 145.00 psychological mark and remain capped near the 145.25-145.35 static barrier. A sustained strength beyond the latter might trigger a short-covering rally and allow the USD/JPY pair to reclaim the 146.00 mark. The momentum could extend further, though it runs the risk of fizzling out quickly near the 146.65-146.70 region. The latter should act as a pivotal point, which if cleared would negate the negative outlook and shift the near-term bias back in favor of bullish traders.
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.