Prolonged pauses in the monetary policy cycles of the Fed and the Bank of Japan, coupled with the growing risks of a trade war between Tokyo and Beijing, make it more likely that the upward trend in the USD/JPY pair will resume. What should the Japanese government do? Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- China threatens Japan with a trade war.
- Tokyo aims to increase bond issuance.
- The BoJ is unlikely to increase rates within the next 3-6 months.
- Long positions on the USD/JPY pair opened at 156.6 should be maintained until interventions occur.
Weekly Fundamental Forecast for Yen
Donald Trump claimed he had solved the world’s rare-earth element problem. Now, China is refuting this, threatening Japan with export controls on these goods. The US president’s words about annexing Greenland, possibly using armed forces, are perceived by Beijing as a reason to put pressure on Taiwan. His trade war with Tokyo is a new opportunity to buy the USD/JPY pair.
Tightening export controls on rare earth elements and launching an investigation into chips could deal a blow to key sectors of the Japanese economy, including the automotive industry. Additional fiscal stimulus will be needed to support them. The previous ¥17.7 trillion stimulus package from Sanae Takaichi is forcing Tokyo to increase bond issuance. According to Bloomberg estimates, this will mean a ¥65 trillion increase in net supply.
BOJ’s Bond Holdings and Net Supply
Source: Bloomberg.
As a result, the cost of servicing debt will increase. The government will do everything to prevent the BoJ from raising its overnight rate. No matter how much Kazuo Ueda talks about continuing the cycle of monetary tightening, the next step is likely to take between three and six months.
Given the Fed’s prolonged pause, US-Japanese bond yield spreads will remain elevated. These conditions are ideal for carry traders, weakening the yen’s position as a funding currency.
Neither the Bank of Japan nor the Japanese government desires devaluation. Therefore, as USD/JPY quotes rise, the risk of currency intervention will increase. The only problem is that current conditions are unfavorable for such intervention. Tokyo’s previous interventions in the Forex market were successful due to the weakness of the US dollar. Now, such interventions can only be triggered by Donald Trump’s pressure on the Fed.
Japanese Stocks Bought by Domestic Firms and Foreign Investors
Source: Bloomberg.
While Japanese investors were in no hurry to repatriate their money in 2025, non-residents increased their net purchases of shares in Japanese companies by 35-fold to $5.4 trillion. The main reason cited was the uncertainty surrounding the US administration’s policies.
Amid capital flowing from the US to Japan, the USD/JPY pair declined in the first half of 2025. In the second half of the year, Donald Trump calmed down, the dollar stabilized, and the yen weakened. Will the story of spring 2025, with its “Sell America” sentiment, repeat itself? It is quite possible, but so far the most likely scenario seems to be Tokyo’s transition to ineffective currency interventions.
Weekly USDJPY Trading Plan
Long positions formed at 156.6 can be kept open until the USD/JPY pair reaches a new swing high. After that, the pair can be purchased on pullbacks.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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