- The Japanese Yen attracts safe-haven flows amid trade war fears and risk-off mood.
- A downward revision of Japan’s Q4 GDP does little to dent the JPY bullish sentiment.
- The divergent BoJ-Fed expectations support prospects for a further USD/JPY decline.
The Japanese Yen (JPY) remains on the front foot and touches a fresh multi-month top against its American counterpart during the Asian session on Tuesday. The recent sharp narrowing of the yield differential between Japan and other countries helps offset the downward revision of Japan’s Q4 GDP print. This, along with the prevalent risk-off environment, turn out to be key factors underpinning the safe-haven JPY.
However, concerns that US President Donald Trump could impose fresh tariffs on Japan hold back the JPY bulls from placing fresh bets. The US Dollar (USD), on the other hand, remains depressed near a multi-month low amid rising bets that a tariff-driven US economic slowdown might force the Federal Reserve (Fed) to cut rates multiple times this year, which should cap any attempted recovery for the USD/JPY pair.
Japanese Yen is underpinned by BoJ rate hike bets and the global flight to safety
- The Cabinet Office’s revised data released this Tuesday showed that Japan’s economic growth slowed to 2.2% on an annualized basis in the fourth quarter, lower than the initial estimate of 2.8% rise. On a quarter-to-quarter basis, the economy expanded by 0.6% as compared with a 0.7% growth in preliminary data released last month.
- The data reaffirms market bets that the Bank of Japan will keep the policy rate steady at its next policy meeting on March 18-19. That said, traders are pricing in the possibility of another BoJ rate hike as soon as May amid concerns about broadening inflation in Japan and hopes that bumper wage hikes seen last year will continue this year.
- BoJ Deputy Governor Shinichi Uchida signaled last week that the central bank was likely to raise interest rates at a pace in line with dominant views among financial markets and economists. This had been a key factor behind the recent surge in the 10-year Japanese government bond yield to its highest level since October 2008 set on Monday.
- Japan’s Economy Minister Ryosei Akazawa highlighted the importance of exchange rates moving in accordance with economic fundamentals while reaffirming that monetary policy decisions rest with the BoJ. Separately, Japan’s Finance Minister Shunichi Kato said that higher long-term interest rates could have wide-ranging effects on the economy.
- Meanwhile, Japan Trade Minister Yoji Muto said that he would continue discussing tariffs with the US and did not confirm that Japan is exempt from steel tariffs. US President Donald Trump’s 25% tariffs on global steel and aluminum imports go into effect on Wednesday. Furthermore, there are other levies planned for April 2.
- The US Dollar languishes near its lowest level since November amid the growing acceptance that the Federal Reserve will start its rate-cutting cycle sooner amid signs of a weakening US labor market. This, along with the uncertainty over Trump’s trade policies and their impact on the US economic growth, backs the case for further monetary easing.
- Traders now look forward to the Job Openings and Labor Turnover Survey (JOLTS) for some impetus later during the North American session. The focus, however, will remain glued to the latest US consumer inflation figures on Wednesday, which will influence the USD price dynamics and determine the near-term trajectory for the USD/JPY pair.
USD/JPY bears take a brief pause as daily RSI remains close to the oversold territory
From a technical perspective, the Relative Strength Index (RSI) on the daily chart remains on the verge of breaking into the oversold territory and warrants some caution for bearish traders. Hence, it will be prudent to wait for some near-term consolidation or a modest bounce before positioning for an extension of a two-month-old downtrend. However, any attempted recovery beyond the 147.25-147.30 immediate hurdle is likely to attract fresh sellers ahead of the 148.00 round figure. This is followed by the 148.60-148.70 strong horizontal support breakpoint, now turned resistance, which should now act as a key pivotal point and cap the USD/JPY pair.
On the flip side, the Asian session swing low, around the 146.55-146.50 area, could offer some support, below which the USD/JPY pair could accelerate the slide towards the 146.00 mark. The downward trajectory could extend further towards the 145.25 intermediate support en route to the 145.00 psychological mark.
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.