- The Japanese Yen attracts fresh sellers amid reports of additional US tariffs.
- Mixed BoJ rate hike cues further undermine the JPY amid a positive risk tone.
- Rising September Fed rate cut bets weigh on the USD and cap the USD/JPY pair.
The Japanese Yen (JPY) remains on the back foot through the Asian session on Thursday in the wake of reports that US President Donald Trump could impose an additional 15% tariff on all imports from Japan. Apart from this, the uncertainty over the likely timing of the next interest rate hike by the Bank of Japan (BoJ) and a generally positive risk tone undermine the safe-haven JPY. This, along with a modest US Dollar (USD) recovery from over a one-week low touched on Wednesday, assists the USD/JPY pair to stick to intraday gains near mid-147.00s.
The JPY bears, however, seem reluctant to place aggressive bets amid the growing acceptance for an imminent interest rate hike by the BoJ later this year. This marks a significant divergence in comparison to bets that the Federal Reserve (Fed) will lower borrowing costs in September, which keeps a lid on the USD appreciation and acts as a tailwind for the lower-yielding JPY. Hence, it will be prudent to wait for strong follow-through buying before placing fresh bullish bets around the USD/JPY pair and positioning for any further intraday move higher.
Japanese Yen bulls remain on the sidelines amid fresh trade jitters
- Asahi newspaper, citing a White House official, reported this Thursday that US President Donald Trump could impose an extra 15% tariff on all Japanese imports. The US will not apply exceptions to Japan for products that already have tariffs exceeding 15%, the report added further.
- This adds a layer of uncertainty on the back of the recent political developments in Japan. In fact, the ruling Liberal Democratic Party’s loss in the upper house election on July 20 raised concerns about Japan’s fiscal health amid calls from the opposition to boost spending and cut taxes.
- Moreover, data released on Wednesday showed that real wages in Japan fell for the sixth straight month in June and fueled worries about a consumption-led recovery. This suggests that prospects for Bank of Japan rate hikes could be delayed and undermines the Japanese Yen.
- The BoJ, however, has repeatedly said that it will hike interest rates further if growth and inflation continue to advance in line with its estimates. This is holding back the JPY bears from placing aggressive bets and acting as a tailwind for the USD/JPY pair despite a bearish US Dollar.
- The USD Index (DXY), which tracks the greenback against a basket of currencies, fell to a one-week low on Wednesday amid expectations for more interest rate cuts than previously expected by the Federal Reserve this year. The bets were lifted by the incoming weaker US macro data.
- The US Nonfarm Payrolls report for July pointed to a sharp deterioration in labor market conditions. Furthermore, the US ISM Services PMI released on Tuesday underscored the ongoing drag on the economy amid the uncertainty surrounding Trump’s erratic trade policies.
- This, in turn, affirmed market bets that the Fed will resume its rate-cutting cycle in September and lower borrowing costs by 25 basis points at least two times by the year-end. This keeps the US Treasury bond yields and the USD depressed, which could cap gains for the USD/JPY pair.
- Traders now look forward to the release of the US Weekly Initial Jobless Claims data, due later during the North American session. Apart from this, speeches from FOMC members could drive the USD demand. This, along with trade headlines, might influence the currency pair.
USD/JPY remains capped near 38.2% Fibo., 148.00 holds the key
From a technical perspective, this week’s rebound from the 200-period Simple Moving Average (SMA), around the 146.60 area, or the weekly low, and the subsequent move up favors the USD/JPY bulls. However, oscillators on the said chart are yet to confirm the positive outlook. Moreover, spot prices, so far, have been struggling to clear the 38.2% Fibonacci retracement level of the upswing from the July monthly low. This, in turn, makes it prudent to wait for a sustained move beyond the 147.80-147.85 region before positioning for any further gains. The currency pair might then surpass the 148.00 round figure and climb to the 148.45-148.50 region. The momentum could extend further towards the 149.00 neighborhood, or the 23.6% Fibo. retracement level.
On the flip side, the Asian session low, around the 147.15 region, closely followed by the 147.00 mark, could offer immediate support to the USD/JPY pair ahead of the 146.75 confluence. The latter represents the 200-period SMA on the 4-hour and the 50% Fibo. retracement level, which, if broken decisively, should pave the way for deeper losses. Spot prices might then accelerate the fall towards testing sub-146.00 levels, or the 61.8% Fibo. retracement level. Some follow-through selling below the latter could expose 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.