The Japanese Yen struggles to gain any meaningful traction amid trade jitters and reduced BoJ rate hike bets.Furthermore, domestic political uncertainty turns out to be another factor that acts as a headwind for the JPY.Diminishing odds for an immediate rate cut by the Fed lend some support to the USD and the USD/JPY pair.
The Japanese Yen (JPY) languishes near a three-week low against its American counterpart during the Asian session on Monday amid reduced bets for an immediate interest rate hike by the Bank of Japan (BoJ). Furthermore, expectations that the Federal Reserve (Fed) will keep rates elevated for an extended period act as a tailwind for the US Dollar (USD) and lend support to the USD/JPY pair.
This, along with domestic political uncertainty, overshadows the report that the BoJ is likely to consider increasing its inflation forecast at the next monetary policy meeting later this month and fails to impress the JPY bulls. Even the risk-off mood, fueled by US President Donald Trump’s threat to impose a 30% tariff on Mexico and the European Union (EU), does little to provide any impetus to the safe-haven JPY.
Japanese Yen seems vulnerable as trade tensions temper BoJ rate hike betsIn a further escalation of trade wars, US President Donald Trump announced new tariffs on two of the biggest trade partners – Mexico and the European Union – in separate letters on Saturday. This, in turn, tempers investors’ appetite for riskier assets and benefits the safe-haven Japanese Yen at the start of a new week. Earlier last week, Trump issued tariff notices to more than 20 countries, including Japan, and also a 50% tariff on copper imports. This comes on top of declining real wages and signs of cooling inflation in Japan, which, along with domestic political uncertainty, could allow the Bank of Japan to forgo raising rates this year. Recent media polls raised doubts about whether Japan’s ruling coalition of the Liberal Democratic Party (LDP) and Komeito will be able to secure enough seats to maintain their majority at the upper house election on July 20. This adds a layer of uncertainty and should keep a lid on any meaningful JPY appreciation. Traders pared their bets for a rate cut by the Federal Reserve later this month in anticipation of worsening inflation as a result of higher import taxes and a still resilient US labor market. This keeps the US Dollar close to a nearly three-week top touched earlier this Monday and offers support to the USD/JPY pair. Traders now look forward to the release of US inflation figures – the Consumer Price Index (CPI) and the Producer Price Index (PPI) on Tuesday and Wednesday, respectively. The data should provide cues about the Fed’s rate-cut path, which, along with speeches from influential FOMC members, will drive the USD. Meanwhile, the aforementioned fundamental backdrop warrants some caution for the JPY bulls and backs the case for the emergence of some dip-buying around the USD/JPY pair. USD/JPY bullish technical setup backs the case for a move towards the 148.00 mark
Last week’s sustained breakout through and a daily close above the 100-day Simple Moving Average (SMA) for the first time since February 2025 was seen as a key trigger for the USD/JPY bulls. Moreover, oscillators on the daily chart have been gaining positive traction and are still away from being in the overbought zone. This, in turn, suggests that the path of least resistance for the currency pair is to the upside. Some follow-through buying above the 147.50-147.55 region will reaffirm the constructive setup and lift spot prices to the 148.00 mark or the June swing high. The subsequent move up could extend further towards the May swing high, around the 148.65 region, en route to the 149.00 mark.
On the flip side, any corrective pullback could be seen as a buying opportunity near the 146.60-146.55 region. This is closely followed by the 146.25 intermediate support and the 146.00 round figure. Some follow-through selling, leading to a subsequent fall below the 100-day SMA, currently pegged near the 145.80 region, might shift the bias in favor of the USD/JPY bears and pave the way for a decline towards the 145.50-145.45 area 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.
AloJapan.com