- The Japanese Yen struggles to lure buyers as trade optimism undermines safe-haven assets.
- A modest USD uptick lends additional support to USD/JPY, though the upside seems capped.
- The divergent BoJ-Fed policy expectations might continue to act as a headwind for the pair.
The Japanese Yen (JPY) remains on the back foot for the second consecutive day against a broadly firmer US Dollar (USD) and hangs near a two-week low touched the previous day. A positive outcome from US-China trade negotiations boosts investors’ confidence and turns out to be a key factor undermining the JPY’s safe-haven status. This, along with a firmer US Dollar (USD), assists the USD/JPY pair to hold above the 145.00 psychological mark during the Asian session on Wednesday.
The JPY bears, however, seem reluctant to place aggressive bets amid the growing acceptance that the Bank of Japan (BoJ) will continue raising interest rates. Moreover, a federal appeals court ruled that US President Donald Trump’s tariffs can remain in effect, which adds a layer of uncertainty and should contribute to limiting JPY losses. Adding to this, relatively dovish Federal Reserve (Fed) expectations could act as a headwind for the USD and further benefit the lower-yielding JPY.
Japanese Yen sticks to negative bias amid optimism led by the outcome of US-China trade talks
- Investors turned cautious after a federal appeals court ruled that US President Donald Trump’s “Liberation Day” tariffs on most trading partners could remain in effect while it reviewed a lower court decision to block them. The court, however, is yet to rule on whether the tariffs are permissible under an emergency economic powers act that Trump cited to justify them.
- Data released last week showed that Japan’s economy contracted less than initially estimated during the first quarter. Adding to this, signs of broadening inflation in Japan back the case for further policy normalization by the Bank of Japan. This continues to act as a tailwind for the Japanese Yen, though the optimism over US-China trade talks keeps bulls on the defensive.
- China’s Vice Commerce Minister Li Chenggang told reporters that the Chinese and the US negotiators have agreed on a framework for trade after two days of talks in London. US Commerce Secretary Howard Lutnick said that the framework was the first step to eliminate the negativity, and the implementation plan should result in the resolution of rare earth and magnet issues.
- The optimism stemming from the positive outcome of the crucial US-China trade talks remains supportive of a generally upbeat tone in the equity markets. It undermines the safe-haven status of the JPY. Moreover, signs of easing tensions between the world’s two largest economies assist the US Dollar to attract some buyers and further act as a tailwind for the USD/JPY pair.
- Traders pared their bets that the Federal Reserve will cut interest rates in the next few months following the release of the US Nonfarm Payrolls (NFP) report on Friday, which pointed to a resilient labor market. Traders, however, are still pricing in around 0.45% of easing by the year-end, marking a significant divergence in comparison to hawkish BoJ expectations.
- Traders now look forward to the release of the US Consumer Price Index (CPI), which is forecast to show a pickup that may reinforce the Fed’s wait-and-see stance toward further easing. Nevertheless, the crucial data will be scrutinized for cues about the Fed’s rate-cut path, which, in turn, will influence the USD price dynamics and provide a fresh impetus.
USD/JPY looks to build on momentum beyond the 145.00 mark amid bullish technical setup
From a technical perspective, acceptance above the 100-period Simple Moving Average (SMA) and positive oscillators on daily/hourly charts favor the USD/JPY bulls. However, repeated failures to build on momentum beyond the 145.00 psychological mark make it prudent to wait for some follow-through buying beyond the 145.30 area, or a two-week top touched on Tuesday, before positioning for further gains. Spot prices might then surpass the 145.60-145.65 intermediate hurdle and aim to reclaim the 146.00 round figure before climbing further towards the 146.25-146.30 region, or May 29 swing high.
On the flip side, the 200-period SMA on the 4-hour chart, currently pegged near the 144.30 area, might now protect the immediate downside ahead of the 144.00 mark. A convincing break below the latter will negate the positive outlook and shift the near-term bias in favor of the USD/JPY bears. The subsequent decline could drag spot prices down to the 143.60-143.50 region en route to sub-143.00 levels.
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.
