- The Japanese Yen weakens further against USD amid concerns about Trump’s trade tariffs.
- Bets for more BoJ rate hikes and the risk-off mood could limit losses for the safe-haven JPY.
- The narrowing US-Japan rate differential further contributes to capping the USD/JPY pair.
The Japanese Yen (JPY) sticks to intraday losses against its American counterpart through the Asian session on Monday, though it lacks follow-through amid the prospects for further tightening by the Bank of Japan (BoJ). The expectations were reaffirmed by a rise in Tokyo’s core inflation by the fastest annual pace in nearly a year and the BoJ Summary of Opinions, which showed that policymakers discussed the likelihood of raising interest rates further.
Furthermore, the narrowing interest rate differentials between Japan and the rest of the world, along with the risk-off impulse, offers some support to the safe-haven JPY. That said, concerns about the economic fallout from US President Donald Trump’s trade tariffs keep the JPY bulls on the back foot. Apart from this, broad-based US Dollar (USD) strength assists the USD/JPY pair to stick to its positive bias for the second successive day.
Japanese Yen bears seem reluctant to place aggressive bets amid hawkish BoJ expectations and risk-off mood
- US President Donald Trump signed an order on Saturday to impose 25% tariffs on Canadian and Mexican imports and 10% on goods from China starting on Tuesday.
- Canada’s Prime Minister Justin Trudeau, Mexico’s President Claudia Sheinbaum, and China’s foreign ministry were quick to respond with the upcoming tit-for-tat moves.
- The US Dollar rallies across the board and advances back closer to over a two-year high touched in January, which assists the USD/JPY pair to build on Friday’s move up.
- The Bank of Japan’s Summary of Opinions released earlier this Monday showed that policymakers discussed the likelihood of raising rates further at the January meeting.
- BoJ board members reiterated that it will be necessary to continue hiking rates, if economic activity and prices remain on track, though it does little to boost the Japanese Yen.
- Japan’s Finance Minister Katsunobu Kato said that the government intends to monitor the impact of Trump’s new tariffs on its currency amid worries about the fallout.
- The US-Japan yield differential hovers near a multi-week low. This, along with the risk-off impulse, could help limit a further JPY depreciation in the near term.
- Traders now look forward to this week’s important US macro releases scheduled at the start of a new month, starting with the ISM Manufacturing PMI later today.
- The focus, however, will remain glued to the US monthly employment data – popularly known as the Nonfarm Payrolls (NFP) report due for release on Friday.
USD/JPY struggles to build on intraday positive move; seems vulnerable while below the 156.25 pivotal hurdle
From a technical perspective, last week’s goodish rebound from the 50% retracement level of the December-January rally and the subsequent move up favor bullish traders. That said, any further strength beyond the 156.00 mark might confront some hurdle near last week’s swing high, around the 156.25 area. A sustained strength beyond the said barrier could trigger a fresh bout of a short-covering rally and lift the USD/JPY pair to the 156.70-156.75 region en route to the 157.00 round figure and the 157.60 horizontal barrier. The momentum could extend further towards the 158.00 mark, above which spot prices could aim to retest the multi-month top, around the 158.85-158.90 region touched on January 10.
On the flip side, the 155.00 psychological mark now seems to protect the immediate downside ahead of the 154.55-154.50 horizontal zone and the 154.00 round figure. This is closely followed by the January monthly trough, around the 153.70 area touched last Monday. A convincing break below the latter would be seen as a fresh trigger for bearish traders and make the USD/JPY pair vulnerable to accelerate the fall further towards the 153.30 support. Spot prices could eventually drop to the 153.00 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.
