- The Japanese Yen bulls take a brief pause amid worries about the economic fallout from Trump’s tariffs.
- The risk-off mood and relatively hawkish BoJ expectations could reinstate a bullish tone for the JPY.
- The USD selling bias contributes to capping USD/JPY ahead of the release of the crucial US NFP report.
The Japanese Yen (JPY) continues to attract safe-haven flows during the Asian session on Friday and remains close to a multi-month high touched against its American counterpart the previous day. Signs of broadening inflation in Japan keep the door open for further policy tightening by the Bank of Japan (BoJ). Furthermore, worries about a potential economic fallout from US President Donald Trump’s sweeping reciprocal tariffs continue to undermine the global risk sentiment and benefit the safe-haven JPY.
The aforementioned factors, to a larger extent, offset speculations that the impact of harsher-than-expected US tariffs on Japan’s economy might force the BoJ to hold rates steady for the time being and continue to offer support to the JPY. Apart from this, the prevalent US Dollar (USD) selling bias keeps the USD/JPY pair depressed below the 146.00 mark and supports prospects for further losses. Traders, however, seem reluctant and opt to wait for the US Nonfarm Payrolls (NFP) report before placing fresh bets.
Japanese Yen continues to attract safe-haven flows amid concerns over Trump’s trade tariffs
- In a major blow to Japan’s auto industry, which accounts for around 3% of gross domestic product, US President Donald Trump’s 25% tariff on car imports takes effect as scheduled on Thursday. Moreover, bets for early interest rate hikes by the Bank of Japan retreated amid concerns that harsher US reciprocal tariffs announced on Wednesday could negatively impact Japan’s economy.
- The yield on the benchmark 10-year Japanese government bond tanked on Thursday, posting its biggest drop since August 5 and hitting its lowest level since February 26. This, in turn, is seen weighing on the Japanese Yen during the Asian session on Friday and assisting the USD/JPY pair to register a modest recovery from the lowest level since October touched the previous day.
- Meanwhile, Japan’s Prime Minister Shigeru Ishiba said on Thursday that he will not hesitate to directly approach US President Donald Trump, if appropriate, and will continue to demand the US to reconsider tariff measures. Separately, Japan’s Finance Minister Shunichi Kato warned earlier this Friday that tariffs could have a significant impact on trade systems and global economies.
- BoJ Governor Kazuo Ueda said that Trump tariffs are likely to put downward pressure on Japan, and global economies, though reiterated that the BoJ will guide monetary policy appropriately from the standpoint of sustainably achieving a 2% inflation target. BoJ Deputy Governor Shinichi Uchida said that the central bank will raise interest rates if underlying inflation heightens.
- This comes on top of strong Tokyo consumer inflation figures on Friday, which backs the case for further tightening by the BoJ. In contrast, traders are ramping up expectations for the Federal Reserve to start lowering borrowing costs again in June and cut interest rates four times this year amid concerns that Trump’s policies will trigger an all-out trade war and a global recession.
- The outlook, in turn, led to the overnight slump in the US Treasury bond yields, dragging the yield on the benchmark 10-year US government bond and the US Dollar to their lowest level since October. This might keep a lid on the USD/JPY pair’s attempted recovery. Traders might also opt to wait for the release of the US monthly employment details before placing aggressive bets.
USD/JPY could weaken further while below 146.55-146.50, or the previous YTD low
From a technical perspective, the overnight break below the previous year-to-date low, around the 146.55-146.50 area, was seen as a fresh trigger for the USD/JPY bears. Moreover, oscillators on the daily chart are holding deep in negative territory and are still away from being in the oversold zone. This, in turn, suggests that the path of least resistance for spot prices remains to the downside and supports prospects for a further depreciating move. Hence, a subsequent fall below the overnight swing low, around the 145.20-145.15 region en route to the 145.00 mark and the next relevant support near the 144.50-144.45 zone, looks like a distinct possibility.
On the flip side, any attempted recovery back above the 146.50-146.55 region (the previous YTD low) is likely to attract fresh sellers and remain capped near the 147.00 round figure. A sustained strength beyond the latter, however, might trigger a short-covering rally and lift the USD/JPY pair to the 147.75-147.80 hurdle. This is closely followed by the 148.00 mark, which if cleared decisively should pave the way for additional gains towards the 148.60 intermediate barrier en route to the 149.00 mark and the 149.20 horizontal zone.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
