The Japanese Yen attracts some follow-through sellers after a softer Tokyo CPI print.Some follow-through USD buying contributed to the USD/JPY pair’s positive move.The US-Japan trade deal optimism and BoJ rate hike bets could help limit JPY losses.
The Japanese Yen (JPY) extends the overnight pullback from a two-week top against a broadly stronger US Dollar (USD), lifting the USD/JPY pair to mid-147.00s during the Asian session on Friday. Signs of slowing consumer inflation in Japan’s capital city, Tokyo, along with domestic political uncertainty, could complicate the Bank of Japan’s (BoJ) policy normalization path. Adding to this, the latest trade optimism turns out to be another factor that contributes to the safe-haven JPY’s relative underperformance against its American counterpart for the second straight day.
Meanwhile, the recently announced Japan-US trade deal seems to have reduced economic uncertainty and keeps hopes alive for an imminent interest rate hike by the BoJ later this year. This might hold back the JPY bears from placing aggressive bets. The USD, on the other hand, might struggle to attract strong follow-through buying amid concerns about the Federal Reserve’s (Fed) independence. This might further contribute to capping the USD/JPY pair as traders now look forward to the release of US Durable Goods Orders for short-term opportunities.
Japanese Yen bulls remain on the defensive amid softer Tokyo CPI, receding safe-haven demandThe Statistics Bureau of Japan reported this Friday that the headline Tokyo Consumer Price Index (CPI) rose 2.9% YoY in July as compared to 3.1% in the prior month. Adding to this, a core gauge, which excludes volatile Fresh Food prices, grew 2.9% against expectations of 3.0%, and the 3.1% in June.Meanwhile, core CPI that excludes both Fresh Food and Energy prices, and is closely watched by the Bank of Japan as a gauge of domestic demand-driven inflation, eased to the 2.9% YoY rate in July from 3.1% in the previous month. The data provides evidence that inflation in Japan is cooling.Furthermore, rising political risks, following the ruling coalition’s bruising defeat in the upper house election, might keep the Bank of Japan on the sidelines. This suggests that prospects for rate hikes could be delayed for a little bit longer and undermines the Japanese Yen for the second straight day.The US Dollar, on the other hand, builds on the overnight bounce from a multi-week low and turns out to be another factor that pushes the USD/JPY pair closer to mid-147.00s during the Asian session. However, the uncertainty over the Federal Reserve’s rate-cut path could cap gains for the Greenback.Data released on Thursday showed that US Initial Jobless Claims fell from 221K in the previous week to 217,000 for the week ending July 19, below the 227,000 expected and the lowest level since mid-April. However, Continuing Claims held steady at 1.96 million — near the highest levels since 2021.Moreover, a first look at S&P Global’s PMI showed that business activity in the manufacturing sector lost momentum, while demand in the services sector picked up in July. That said, a gauge measuring the overall business activity – Composite PMI – increased to 54.6 from the previous month’s 52.9.Nevertheless, the resilient US labor market reinforced the view that the Federal Reserve will hold interest rates next week. US President Donald Trump, however, continued to dial up the pressure on Jerome Powell and expressed his desire for lower interest rates during a rare visit to the Fed.Meanwhile, Japan’s trade deal with the US, announced earlier this week, has reduced economic uncertainty and raised the possibility that the BoJ will resume its tightening cycle later this year. This, in turn, could act as a tailwind for the JPY and keep a lid on any further gains for the USD/JPY pair.Friday’s US economic docket highlights the release of Durable Goods Orders later during the North American session, which could influence the USD price dynamics. Apart from this, the broader risk sentiment would drive demand for the safe-haven JPY and produce short-term opportunities.USD/JPY needs to surpass the 147.60 hurdle to back the case for further appreciating move
From a technical perspective, the USD/JPY pair on Thursday bounced off the 145.85 confluence – comprising the 100-day Simple Moving Average (SMA) and the 50% retracement level of the monthly upswing. The subsequent move up, along with positive oscillators on the daily chart, backs the case for a further appreciating move. Some follow-through buying beyond the 147.60 area will reaffirm the positive outlook and allow spot prices to reclaim the 148.00 round figure. The momentum could extend further towards the weekly top, around the 148.65 region, above which the currency pair could make a fresh attempt to conquer the 149.00 mark.
On the flip side, the 147.00 round figure now seems to protect the immediate downside ahead of the 146.70-146.65 region, or the 38.2% Fibonacci retracement level. This is closely followed by the 100-day SMA, around the 146.55 area, below which the USD/JPY pair could slide to retest sub-146.00 levels. Some follow-through selling below the 145.75 area (July 10 low) might then drag spot prices to the 145.20-145.15 region, or the 61.8% Fibo. retracement level, 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