- The Japanese Yen attracts some dip-buyers and stalls its pullback from a multi-month low against the USD.
- Hopes for a US-Japan trade deal and rising bets for more BoJ rate hikes in 2025 continue to underpin the JPY.
- A positive turnaround in the global risk sentiment keeps a lid on any meaningful gains for the safe-haven JPY.
The Japanese Yen (JPY) remains on the back foot against a broadly recovering US Dollar (USD) as the risk-on impulse is seen undermining demand for traditional safe-haven assets. Trump administration officials hinted at a potential de-escalation of the ongoing tariff dispute with China and fueled optimism about a trade deal. Furthermore, Trump stepped back from his threats to dismiss Federal Reserve (Fed) Chair Jerome Powell, which, along with easing geopolitical tensions, boosted investors’ confidence.
The JPY, however, stalls the intraday downtick amid the growing optimism that the US and Japan are moving closer to an interim arrangement on trade. Adding to this, the growing acceptance that the Bank of Japan (BoJ) will continue raising interest rates in 2025 helps limit deeper JPY losses. Moreover, the prospects for more aggressive policy easing by the Federal Reserve (Fed) act as a headwind for the US Dollar (USD) and contribute to capping the USD/JPY’s recovery from a multi-month low.
Japanese Yen continues to draw support from hopes for US-Japan trade deal, BoJ rate hike bets
- The global risk sentiment gets a strong boost after US Treasury Secretary Scott Bessent said at a private investor summit that the tit-for-tat tariff war between the US and China would de-escalate soon. Later, White House spokeswoman Karoline Leavitt told reporters that the Trump administration is setting the stage for a deal. This, in turn, contributes to improving investors’ appetite for riskier assets and driving flows away from perceived safe-haven assets, including the Japanese Yen.
- Meanwhile, US President Donald Trump ruled out the possibility of taking the unprecedented step of firing Federal Reserve Chair Jerome Powell before the expiry of his term in May 2026. This, in turn, triggers a goodish US Dollar recovery from a three-year low, which assists the USD/JPY pair to attract some follow-through buyers during the Asian session on Wednesday. The USD move up, however, runs out of steam amid the prospects for more aggressive policy easing by the Fed.
- According to the CME Group’s FedWatch Tool, traders are pricing in the possibility that the Fed will lower borrowing costs by 25 basis points in June and deliver at least three rate cuts by the end of this year. This marks a big divergence in comparison to a rising consensus that the Bank of Japan will continue hiking interest rates in 2025. Apart from this, the hope that Japan might strike a trade deal with the US helps limit the JPY losses and prompt some intraday selling around the USD/JPY pair.
- In fact, the new US ambassador to Japan said last Friday that he is optimistic about a deal in the ongoing US-Japan tariff negotiations. However, Japan’s Economic Revitalization Minister Ryosei Akazawa said that any agreement would likely take some time as it’s difficult to say how long it will take to bridge the gap between the two sides. This might keep a lid on any optimism in the market and warrants some caution before placing aggressive bullish bets around the USD/JPY pair.
- Meanwhile, the preliminary Purchasing Managers’ Index (PMI) released earlier this Wednesday showed that Japanese manufacturing activity has shrunk for the tenth consecutive month in April. The au Jibun Bank manufacturing PMI came in at 48.5 in April, slightly higher compared to 48.4 in the previous month. In contrast, Japanese services activity rebounded and the au Jibun Bank Services PMI rose to 52.2 during the reported month compared to a neutral reading of 50.0 in March.
- Wednesday’s economic docket also features the release of flash global PMIs, which might provide a fresh insight into the global economic health. Apart from this, trade-related developments would play a key role in influencing the broader market risk sentiment and driving demand for the safe-haven JPY.
USD/JPY seems vulnerable while below the 23.6% Fibo. level/143.00; not out of the woods yet
From a technical perspective, the USD/JPY pair showed some resilience below the 140.00 psychological mark on Tuesday and the subsequent short-covering rally warrants some caution for bearish traders. The recovery momentum, however, struggles to find acceptance above the 143.00 mark or the 23.6% Fibonacci retracement level of the March-April downfall. This, in turn, should now act as a key pivotal point, above which spot prices might aim to surpass the Asian session peak, around the 143.20 area, and climb further towards reclaiming the 144.00 mark. The momentum could extend further towards the 144.25-144.30 region or the 38.2% Fibo. level.
On the flip side, weakness below the 141.45 zone, or the Asian session low, now seems to find decent support near the 141.00 mark. A convincing break below the latter, however, will suggest that the recent downtrend is still far from being over and make the USD/JPY pair vulnerable to retesting sub-140.00 levels, with some intermediate support near the 140.45 region. The subsequent downfall would expose the 2024 swing low, around the 139.60-139.55 area.
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.
