- The Japanese Yen continues to attract safe-haven flows amid the escalating US-China trade war.
- Hopes that Japan might strike a trade deal with the US contribute to the bid tone around the JPY.
- The divergent BoJ-Fed policy expectations provide an additional boost to the lower-yielding JPY.
The Japanese Yen (JPY) trims a part of strong Asian session gains, though it remains within striking distance of the highest level since late September 2024 touched against a broadly weaker US Dollar (USD) last Friday. Persistent worries about the escalating US-China trade war and its impact on the global economy turn out to be a key factor driving flows towards the safe-haven JPY. Adding to this hopes that Japan might strike a trade deal with the US offer additional support to the JPY.
Meanwhile, signs of broadening inflation in Japan keep the door open for more interest rate hikes by the Bank of Japan (BoJ). This marks a big divergence in comparison to bets that the Federal Reserve (Fed) will lower borrowing costs at least three times by the end of this year on the back of worries about a tariffs-driven US economic slowdown. The resultant narrowing of the rate differential between Japan and the US supports prospects for a further appreciation for the lower-yielding JPY.
Japanese Yen continues to attract safe-haven flows amid rising US-China trade tensions
- China’s announced on Friday that it has raised tariffs on US goods to 125%, while US President Donald Trump hiked duties on Chinese imports to an unprecedented 145%. This fuel worries about the potential economic fallout from the escalating trade war between the world’s two largest economies and drive some safe-haven flows toward the Japanese Yen.
- Investors remain optimistic about a positive outcome from US-Japan trade talks. In fact, Trump said last week that tough but fair parameters are being set for a negotiation. Adding to this, US Treasury Secretary Scott Bessent said that Japan may be a priority in tariff negotiations, fueling hopes for a possible US-Japan trade deal and further underpinning the JPY.
- Japanese Prime Minister (PM) Shigeru Ishiba warned on Monday that “US tariffs have the potential to disrupt the world economic order.” Separately, Japan’s Finance Minister Shunichi Kato said that “the US and Japan share the view that excessive FX volatility is undesirable.” Moreover, Japan’s Economy Minister Ryosei Akazawa stated that “the FX issues will be dealt with between Finance Minister Kato and US Treasury Secretary Scott Bessent.”
- Meanwhile, the Bank of Japan’s preliminary report released last Thursday showed that annual wholesale inflation accelerated to 4.2% in March. This is a sign of persistent cost pressures, which, along with strong wage growth, should contribute to mounting domestic inflationary pressure and allow the BoJ to continue raising interest rates this year.
- In contrast, the latest reading of the US Consumer Price Index indicated that inflation slowed sharply in March. This comes on top of the weakening confidence in the US economy and should allow the Federal Reserve to resume its rate-cutting cycle. Moreover, market participants are now pricing in the possibility of 90 basis points of rate cuts by the end of this year.
- The divergent BoJ-Fed policy expectations turn out to be another factor that benefits the lower-yielding JPY. The US Dollar, on the other hand, languishes near its lowest level since April 2022 touched on Friday. This, in turn, drags the USD/JPY pair back closer to a multi-month low during the Asian session on Monday and supports prospects for further losses.
USD/JPY technical setup supports prospects for an extension of a multi-month-old downtrend
From a technical perspective, the daily Relative Strength Index (RSI) is on the verge of breaking into the oversold territory and warrants some caution for bearish traders. Hence, it will be prudent to wait for some near-term consolidation or a modest bounce before positioning for an extension of over a three-month-old downtrend. In the meantime, the 142.00 mark, or a multi-month low touched on Friday, could offer some support to the USD/JPY pair. A convincing break below could drag spot prices towards the 141.65-141.60 intermediate support en route to the 141.00 mark. Some follow-through selling below the 140.75 zone might expose the September 2024 swing low, around the 140.30-140.25 region, before the pair eventually drops to the 140.00 psychological mark.
On the flip side, any attempted recovery back above the 143.00 mark is likely to confront stiff resistance near the 143.50-143.55 zone. The subsequent move up could lift the USD/JPY pair to the Asian session peak, around the 144.00 round figure, which if cleared decisively might trigger a short-covering rally to the 144.45-144.50 horizontal resistance. The momentum could extend further towards reclaiming the 145.00 psychological mark en route to the 145.50 zone and the 146.00 round figure.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.