- The Japanese Yen resumes its short-term downtrend amid receding safe-haven demand.
- The emergence of some USD buying provides an additional boost to the USD/JPY pair.
- The divergent BoJ-Fed policy expectations help limit JPY losses and cap the currency pair.
The Japanese Yen (JPY) remains on the back foot against a broadly recovery US Dollar (USD), though it has managed to trim a part of intraday losses to a nearly two-week low touched during the Asian session on Tuesday. The optimism over the ongoing US-China trade talks turns out to be a key factor undermining the safe-haven JPY. However, firming expectations that the Bank of Japan (BoJ) will hike interest rates again hold back the JPY bears from placing aggressive bets.
In contrast, traders have been pricing in the possibility that the Federal Reserve (Fed) will lower borrowing costs further. This marks a big divergence in comparison to hawkish BoJ expectations, which keeps a lid on any meaningful USD appreciation and contributes to limiting losses for the lower-yielding JPY. Traders also seem reluctant to place aggressive directional bets around the USD/JPY pair and opt to wait for the latest US consumer inflation figures this week.
Japanese Yen attracts some dip-buyers as BoJ Governor Ueda reaffirms rate-hike bets
- Top US and Chinese officials will meet for a second day in London on Tuesday for negotiations aimed at resolving the ongoing trade dispute between the world’s two largest economies. Investors remain hopeful of a breakthrough over export controls for goods, such as rare earths, which remains supportive of a positive risk tone and undermines the safe-haven Japanese Yen.
- Data released on Monday showed that Japan’s economy contracted at a slower pace than initially estimated, by 0.2% annualized rate during the January-March quarter, sparking optimism about the outlook. This, in turn, reaffirms market bets that the Bank of Japan will continue normalizing rates amid sticky inflation and should help limit any meaningful downfall for the JPY.
- BoJ Governor Kazuo Ueda said on Tuesday that the central bank will raise interest rates if it has enough confidence that the underlying inflation nears 2% or moves around 2%. If the economy and prices come under strong downward pressure, the central bank has limited room to underpin growth with interest rate cuts, with short-term rate still at 0.5%, Ueda added further.
- A stronger-than-expected US Nonfarm Payrolls (NFP) report released on Friday dampened hopes for imminent interest rate cuts by the Federal Reserve this year. This assists the US Dollar to regain positive traction following the previous day’s modest slide and pushes the USD/JPY pair back closer to the 145.00 psychological mark during the Asian session on Tuesday.
- Traders, however, are still pricing in a greater chance that the US central bank will lower borrowing costs in September. Furthermore, Trump intensified his pressure campaign and urged Fed Chair Jerome Powell to cut rates by a full percentage point. This, along with concerns about the US government’s financial health, might cap further USD appreciation.
- According to Ukraine’s air force, Russia launched a massive airstrike on Ukraine and fired nearly 500 drones and missiles, marking a further escalation of the conflict in the three-year-old war. This keeps geopolitical risks in play, which should hold back the JPY bears from placing aggressive bets and act as a headwind for the USD/JPY pair ahead of US inflation figures.
USD/JPY seems poised to add to its intraday gains; breakout above 100-hour SMA in play
From a technical perspective, the overnight bounce from sub-144.00 levels, or the 100-period Simple Moving Average (SMA) on the 4-hour chart, and the subsequent move up favors the USD/JPY bulls. Moreover, oscillators on the daily chart have just started gaining positive traction, suggesting that the path of least resistance for spot prices is to the upside. Hence, some follow-through strength towards the 145.60-145.65 intermediate hurdle, en route to the 146.00 round figure, looks like a distinct possibility. The momentum could extend further towards the 146.25-146.30 region, or May 29 swing high.
On the flip side, the 145.00 mark now seems to protect the immediate downside ahead of the 144.60-144.55 region. This is closely followed by the 144.25 area (200-period SMA on the 4-hour chart), below which the USD/JPY pair could retest sub-144.00 levels. The latter should act as a key pivotal point, which if broken decisively would negate the positive outlook and shift the near-term bias in favor of bearish traders.
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.