- 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) rebounds from a nearly two-week low touched against a broadly recovering US Dollar (USD) during the Asian session on Tuesday and currently trades with modest intraday losses. The optimism over the resumption of US-China trade talks turns out to be a key factor undermining the safe-haven JPY, though the growing acceptance that the Bank of Japan (BoJ) will continue raising interest rates helps limit further losses.
Meanwhile, hawkish BoJ expectations mark a big divergence in comparison to bets that the Federal Reserve (Fed) will lower borrowing costs again. This, in turn, keeps a lid on any meaningful USD appreciation and offers additional support to the lower-yielding JPY. Traders also seem reluctant and opt to wait for the release of key US inflation figures this week before positioning for the next leg of a directional move for the USD/JPY pair.
Japanese Yen bears seem reluctant to place aggressive bets amid hawkish BoJ expectations
- 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 could attract dip-buyers near the 200-period SMA on H4, around the 144.25 region
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.
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.