- The Japanese Yen strengthens as BoJ’s Tankan Survey reaffirms rate hike bets.
- The risk-on mood and stalled US-Japan trade talks act as a headwind for the JPY.
- Divergent BoJ-Fed policy expectations should cap attempted USD/JPY recovery.
The Japanese Yen (JPY) trims a part of its strong Asian session gains and assists the USD/JPY pair to recover around 40 pips from a nearly three-week low touched earlier this Tuesday. US President Donald Trump’s hints at more tariffs on Japan, along with the upbeat market mood, keep a lid on the JPY’s intraday move higher. However, hawkish Bank of Japan (BoJ) expectations might continue to act as a tailwind for the JPY and favor bullish traders.
Investors seem convinced that the BoJ will continue raising interest rates amid signs of broadening inflation in Japan. The bets were reaffirmed by BoJ’s Tankan Survey, which showed that firms expect consumer prices to remain above the central bank’s 2% annual target over the next five years. In contrast, the Federal Reserve (Fed) is expected to resume its rate-cutting cycle in the near future. This keeps the US Dollar (USD) depressed and should cap the USD/JPY pair.
Japanese Yen turn cautious amid positive risk tone and trade jitters
- The Bank of Japan’s Tankan Survey showed this Tuesday that business confidence at large manufacturers in Japan rose to 13.0 in the second quarter from 12.0 in Q1, above the market consensus of 10.0. Moreover, the large Manufacturing Outlook for the second quarter arrived at 12.0 versus 12.0 prior, stronger than the 9.0 expected.
- Further details revealed that firms expect consumer prices to rise by 2.4% over the next three years and by 2.3% annually over the next five years. This highlights mounting inflationary pressure in Japan, which may require the BoJ to raise interest rates further and provide a goodish lift to the Japanese Yen during the Asian session.
- Japan’s top negotiator, Ryosei Akazawa, returned after his seventh round of talks in Washington without a major breakthrough. However, Akazawa said he remains committed to reaching an agreement while safeguarding Japan’s economic interests. US President Trump expressed frustration with stalled US-Japan trade negotiations.
- Meanwhile, Trump said that he may move ahead with the 25% tariff on Japanese autos and also lashed out against Japan over its alleged unwillingness to buy American-grown rice. Furthermore, Trump hinted at potentially ending trade talks with Tokyo and threatened to raise tariffs on certain countries by his July 9 deadline.
- The US Dollar registered a hefty 2.6% monthly fall in June, and the selling bias remains unabated on the back of dovish Federal Reserve expectations. The markets are now pricing in a smaller chance that the next rate reduction by the Fed will come in July and see a roughly 74% probability of a rate cut as soon as September.
- Meanwhile, the Senate on Saturday narrowly approved a procedural vote to open debate on Trump’s comprehensive “One Big Beautiful Bill,” which would add approximately $3.3 trillion to the federal deficit over the next decade. This contributes to the bearish sentiment in the USD and further exerts pressure on the USD/JPY pair.
- Traders now look forward to important US macro releases scheduled at the beginning of a new month, starting with the US ISM Manufacturing PMI and Job Openings and Labor Turnover Survey (JOLTS) due later today. The focus, however, will be on the closely-watched US Nonfarm Payrolls (NFP) report on Friday.
USD/JPY is likely to remain capped near 200-SMA on H4 hurdle
From a technical perspective, an intraday slide below last week’s swing low, around the 143.75 region, could be seen as a key trigger for the USD/JPY bears against the backdrop of the recent breakdown through the 200-period Simple Moving Average (SMA) on the 4-hour chart. Moreover, oscillators on 4-hour and daily charts have been gaining negative traction, suggesting that the path of least resistance for spot prices is to the downside. Hence, a subsequent slide towards the 143.00 mark, en route to the next relevant support near the 142.75-142.70 region, looks like a distinct possibility.
On the flip side, the 144.00 round figure now seems to cap any attempted recovery. Any further move up could be seen as a selling opportunity and cap the USD/JPY pair near the 200-period SMA on the 4-hour chart, currently pegged near the 144.40 region. A sustained strength beyond the latter, however, might trigger a short-covering rally and allow spot prices to reclaim the 145.00 psychological 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.