- The Japanese Yen remains on the back foot against the USD for the second consecutive day.
- Concerns about Trump’s trade tariffs and a positive risk tone undermine the safe-haven JPY.
- The divergent BoJ-Fed policy expectations should limit any meaningful downside for the JPY.
The Japanese Yen (JPY) weakens further against its American counterpart for the second straight day, pushing the USD/JPY pair back above the 148.00 mark during the Asian session on Wednesday. Investors remain worried that US President Donald Trump could impose fresh tariffs on Japan. This, along with a positive turnaround in the global risk sentiment, undermines demand for the safe-haven JPY.
Any meaningful JPY depreciation, however, seems elusive in the wake of hawkish Bank of Japan (BoJ) expectations. In fact, traders have been pricing in the possibility of more rate hikes by the BoJ amid signs of broadening inflation in Japan. The bets were further lifted by Data released earlier today, which showed that Japan’s annual wholesale inflation – Producer Price Index (PPI) – rose 4.0% in February.
Adding to this hopes that bumper wage hikes seen last year will continue this year remain supportive of expectations for a further policy tightening by the BoJ. This, along with the recent sharp narrowing of rate differentials between Japan and other countries could support the lower-yielding JPY. Traders might refrain from placing directional bets around the USD/JPY pair ahead of the US consumer inflation figures.
Japanese Yen bulls have the upper hand amid hawkish BoJ expectations
- US President Donald Trump on Tuesday threatened a 50% tariff on steel and aluminum from Canada, though he reversed course after Ontario paused surcharges on electricity to US customers. Earlier, Japan’s Trade Minister Yoji Muto said that he has failed to win assurances from US officials that Japan will be exempt from steel tariffs, which take effect on Wednesday.
- The lower house of Congress narrowly passed a Republican spending bill that would avoid a government shutdown on March 14 and keep the US government open until September. The bill now heads to the Senate and will need the support of at least seven Democrats to overcome the 60-vote filibuster threshold before being sent to Trump for his signature.
- Data published by the Bank of Japan this Wednesday showed that the Producer Price Index (PPI) slowed to a 4.0% year-on-year rate in February from 4.2% in the previous month. Given that consumer inflation in Japan has exceeded the central bank’s target for nearly three years, the latest PPI supports prospects for further monetary policy tightening by the BoJ.
- BoJ Governor Kazuo Ueda, when asked about the recent rise in long-term rate, said that we don’t see a big divergence between our view and that of the markets. It is natural for long-term rates to move in a way that reflects the market’s outlook for the short-term policy rate. The rise in long-term rates, however, is likely to push up the cost of funding government finances.
- Japan’s largest companies are expected to offer substantial wage hikes for a third consecutive year, helping workers cope with inflation and retain staff amid labour shortages. Higher wages are crucial for BoJ policy decisions, as well as Prime Minister Shigeru Ishiba’s efforts to boost consumer spending amid stagnant real wage growth.
- The yield on the benchmark 10-year Japanese government bond remains close to its highest level since October 2008 touched on Monday. In contrast, the 10-year US Treasury bond yield remains close to a multi-month low touched earlier this March amid concerns about a tariff-driven US economic slowdown and bets for more rate cuts by the Federal Reserve.
- In fact, market participants are now pricing in about three rate cuts of 25 basis points each by the Fed by the end of this year. The bets were lifted by Friday’s weaker US Nonfarm Payrolls report, which pointed to signs of a cooling US labor market. This keeps the US Dollar depressed near its lowest level since mid-October and caps the upside for the USD/JPY pair.
- Traders also seem reluctant and opt to wait for the release of the US consumer inflation figures before positioning for the next leg of a directional move. The crucial Consumer Price Index (CPI) report will play a key role in influencing expectations about the Fed’s rate-cut path, which, in turn, will drive USD demand and provide a fresh impetus to the currency pair.
USD/JPY might struggle to move beyond 148.60-148.70 support breakpoint
From a technical perspective, oscillators on the daily chart are holding deep in negative territory and are still away from being in the oversold zone. This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the downside and any further move up is likely to remain capped near the 148.60-148.70 horizontal support breakpoint. However, some follow-through buying, leading to a subsequent strength beyond the 149.00 mark, might trigger a short-covering rally towards the 149.70-149.75 intermediate resistance en route to the 150.00 psychological mark.
On the flip side, the 147.25 area now seems to act as immediate support ahead of the 147.00 round figure and the 146.55-146.50 zone, or a multi-month trough touched on Tuesday. A break below the latter might turn the USD/JPY pair vulnerable to accelerate the fall toward the 146.00 round figure. The downward trajectory could eventually drag spot prices to the 145.00 psychological mark with some intermediate support near the 145.40-145.35 zone.
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.