- The Japanese Yen attracts fresh sellers amid fading safe-haven demand.
- Worries about Trump’s trade tariffs seem to undermine the JPY further.
- The divergent BoJ-Fed expectations should help limit losses for the JPY.
The Japanese Yen (JPY) remains depressed against its American counterpart through the Asian session on Tuesday, though it lacks follow-through selling amid bets that the Bank of Japan (BoJ) will hike rates further. Moreover, expectations that the Federal Reserve (Fed) will lower borrowing costs twice this year would result in the narrowing rate differential between Japan and the US, limiting losses for the lower-yielding JPY.
That said, US President Donald Trump’s decision to delay plans to impose trade tariffs on Canada and Mexico dents demand for the traditional safe-haven JPY. Adding to this worries that Japan will also be an eventual target for Trump’s tariffs further seem to undermine the JPY. This, along with the emergence of some US Dollar (USD) buying, assists the USD/JPY pair to hold comfortably above the 155.00 psychological mark.
Japanese Yen continues to be weighed down by worries about Trump’s trade tariffs
- Investors breathed a sigh of relief after US President Donald Trump agreed to delay 25% trade tariffs against Canada and Mexico by 30 days, undermining the safe-haven Japanese Yen.
- Japan’s Prime Minister Shigeru Ishiba is set to meet with Trump later this week and their conversation may provide more hints about the risk of tariffs as Japan has a large trade surplus with the US.
- Japan’s Finance Minister Katsunobu Kato said on Monday that the government intends to monitor the impact of Trump’s new tariffs on its currency amid worries about the potential economic fallout.
- Bank of Japan’s Summary of Opinions released on Monday showed board members agreed that it will be necessary to continue hiking interest rates if economic activity and prices remain on track.
- Moreover, a rise in core inflation in Japan’s capital city Tokyo, by the fastest annual pace in nearly a year, keeps alive expectations for further interest rate hikes by the Bank of Japan.
- The Institute of Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index climbed from 49.3 in the previous month to 50.9 in January, beating expectations for a reading of 49.8.
- Additionally, the Prices Paid Index—which measures inflation—rose to 54.9 from 52.5, while the Employment Index increased to 50.3 from 45.4, and the New Orders Index improved to 55.1.
- This comes on top of speculation that Trump’s trade tariffs could push up inflation and give the Federal Reserve less impetus to cut interest rates further, which underpins the US Dollar.
- The view was echoed by comments from Chicago Fed President Austan Goolsbee, who warned that uncertainty over Trump’s policies could delay the central bank’s plans to cut interest rates.
- Separately, Atlanta Fed President Raphael Bostic noted on Monday that although the US labor market remains surprisingly resilient, tariff threats throw a wrench into outlook expectations.
- Meanwhile, Fed governor Michelle Bowman said on Friday that rate cuts are still expected this year but added that future moves should be cautious and gradual, with time to assess data.
- Traders now look forward to the US economic data – Job Openings and Labor Turnover Survey (JOLTS) and Factory Orders – for short-term opportunities later during the North American session.
USD/JPY pair needs to find acceptance above the 156.00 mark for bulls to retain control
From a technical perspective, the USD/JPY pair might continue to confront stiff resistance near the 156.00 mark. This is closely followed by last week’s swing high, around the 156.25 region, above which spot prices could climb to the 156.75 supply zone. Some follow-through buying, leading to subsequent strength beyond the 157.00 round figure, will shift the bias in favor of bullish traders and pave the way for a move towards reclaiming the 158.00 mark with some intermediate hurdle near the 157.50 area.
On the flip side, weakness below the 155.00 psychological mark now seems to find support near the 154.65 region ahead of the 154.30 area, the 154.00 round figure, and the 153.70 zone, or over a one-month low touched in January. A convincing break below the said support levels could make the USD/JPY pair vulnerable to accelerate the fall towards the 153.00 mark en route to the 152.60-152.55 region and the 152.30 area. The latter represents the 100-day Simple Moving Average (SMA) and should act as a strong base for spot prices.
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.
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.
