Japanese Yen sticks to intraday gains; seems poised to appreciate further amid BoJ rate hike bets
- The Japanese Yen catches fresh bids in reaction to Japan’s strong Services PPI.
- The data reaffirms BoJ rate hike bets and boosts the JPY amid geopolitical risks.
- Dovish Fed expectations undermine the USD and exert pressure on USD/JPY.
The Japanese Yen (JPY) retreats a few pips from over a one-month high touched against a weaker US Dollar (USD) during the Asian session on Tuesday, in reaction to strong domestic inflation data. US President Donald Trump’s announcement to delay imposing tariffs on the European Union (EU) is seen as acting as a headwind for the safe-haven JPY. However, geopolitical risks and US fiscal concerns keep a lid on the optimism.
Furthermore, the growing acceptance that the Bank of Japan (BoJ) will hike interest rates again this year favors the JPY bulls. This marks a big divergence in comparison to bets that the Federal Reserve (Fed) will lower borrowing costs further in 2025, which continues to weigh on the US Dollar (USD) and offer some support to the lower-yielding JPY. Hence, any attempted USD/JPY pair recovery could be seen as a selling opportunity.
Japanese Yen remains supported by hawkish BoJ expectations
- The Bank of Japan reported earlier this Tuesday that the Services Producer Price Index (PPI) – a leading indicator of Japan’s service-sector inflation – rose 3.1% from a year earlier in April. This comes on top of last week’s strong consumer inflation figures and keeps alive expectations of further interest rate hikes by the Bank of Japan.
- Moreover, BoJ Governor Kazuo Ueda showed readiness to continue raising rates and said that the central bank must be vigilant to the risk rising food prices could push up underlying inflation that is already near its 2% target. This provides a goodish lift to the Japanese Yen and drags the USD/JPY pair to over a one-month trough.
- Japan’s Finance Minister Katsunobu Kato said that interest rates reflect various factors, but the market sees rising rates as reflecting concerns about state finances. Kato added that the government will closely monitor the bond market situation amid rising super-long bond yields and will continue close dialogue with bond investors.
- US President Donald Trump announced an extension of the deadline for imposing 50% tariffs on European Union imports to July 9, lifting the global risk sentiment. However, the uncertainty around Trump’s trade policies remains, which keeps investors on edge and turns out to be another factor benefiting the JPY’s safe-haven status.
- Trump called Russian President Vladimir Putin ‘crazy’ and said that he was considering new sanctions against Russia after the biggest drone attack on Ukraine in the more than three-year-old war. Furthermore, Israel continues to pound Gaza, keeping geopolitical risks in play and further underpinning demand for the JPY.
- The US Dollar, on the other hand, struggles to attract any buyers and languishes near the monthly trough amid worries that Trump’s sweeping tax cuts and spending bill would worsen the US budget deficit. This, along with dovish Federal Reserve expectations, exerts additional pressure on the buck and the USD/JPY pair.
- Traders now look forward to the US economic docket – featuring the release of Durable Goods Orders and the Conference Board’s Consumer Confidence Index. The focus, however, will remain glued to the FOMC minutes, the Prelim US Q1 GDP print, and the US Personal Consumption Expenditure (PCE) Price Index.
- Investors this week will also confront the release of Tokyo CPI on Friday, which will play a key role in influencing the JPY price dynamics. Nevertheless, the fundamental backdrop seems tilted in favor of the JPY bulls and suggests that the path of least resistance for the USD/JPY pair remains to the downside.
USD/JPY setup supports prospects for an eventual break below 142.00
From a technical perspective, the previous day’s failure ahead of the 61.8% Fibonacci retracement level of the April-May rally and the subsequent slide favors the USD/JPY bears. Moreover, oscillators on the daily chart are holding in negative territory and are still far away from being in the oversold zone. This, in turn, supports prospects for a further near-term depreciating move for the currency pair. Some follow-through selling below the 142.00 mark will reaffirm the outlook and drag spot prices below the 141.55 intermediate support, towards the 141.00 round figure. The downward trajectory could extend further towards the year-to-date low, or levels below the 140.00 psychological mark touched on April 22.
On the flip side, any attempted recovery might now face stiff resistance near the 143.00 round figure. This is closely followed by the 143.25 area, or the 61.8% Fibo. retracement level, which if cleared decisively could trigger a fresh bout of a short-covering and lift the USD/JPY pair to the 143.65 region en route to the 144.00 mark. A sustained strength beyond the latter could pave the way for further recovery, though the move up might still be seen as a selling opportunity near the 144.80 zone and remain capped near the 145.00 psychological mark.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
