- The Japanese Yen attracts fresh buyers following the release of Japan’s upbeat Q2 GDP print.
- The USD stalls Thursday’s strong US PPI-inspired recovery move and also weighs on USD/JPY.
- The divergent BoJ-Fed policy expectations back the case for a further depreciation of the pair.
The Japanese Yen (JPY) regains positive traction during the Asian session on Friday following the release of Japan’s GDP report, which showed that Japan’s economy expanded more than expected in the second quarter despite US tariff headwinds. This, in turn, reaffirms market expectations that the Bank of Japan (BoJ) will stick to its policy normalization path and provides a goodish lift to the JPY.
Meanwhile, hawkish BoJ expectations mark a significant divergence in comparison to other major central banks, including the Federal Reserve (Fed), which is expected to resume its rate-cutting cycle in September. This fails to assist the US Dollar (USD) to capitalize on a strong US Producer Price Index (PPI)-inspired recovery move and turns out to be another factor driving flows towards the lower-yielding JPY.
The aforementioned supportive factors, to a large extent, offset the prevalent risk-on environment and do little to undermine the safe-haven JPY. However, the uncertainty over the timing of the next interest rate hike by the BoJ ––amid domestic political uncertainty, concern about consumption-led recovery, and the negative impact of higher US tariffs on the economy – warrants some caution for the JPY bulls.
Japanese Yen is underpinned by strong GDP print and relatively hawkish BoJ
- The preliminary reading released by Japan’s Cabinet Office earlier this Friday showed that the Japanese economy grew 0.3% in the second quarter of 2025. On an annualized basis, Japan’s Gross Domestic Product (GDP) expanded by 1.0% during the April-June period, compared to a contraction of 0.2% in the first quarter and consensus estimates for a 0.4% rise.
- Commenting on the report, Japan’s Economy Minister Ryosei Akazawa said that the data confirmed the economy is recovering modestly. Akazawa, however, cautioned that risks from US trade policies could weigh on growth, while rising prices could dampen consumer sentiment and hurt private consumption.
- The data validates the Bank of Japan’s hawkish forecast for the economy to grow 0.6% in the 2025 fiscal year. Furthermore, an upward revision of inflation forecasts by the BoJ keeps the door open for an imminent interest rate hike by the year-end. This, in turn, assists the Japanese Yen to stall the overnight pullback from a multi-week high against the US Dollar.
- The USD Index (DXY), which tracks the Greenback against a basket of currencies, witnessed an intraday short-covering move in reaction to the hotter-than-expected US Producer Price Index. In fact, the US Bureau of Labor Statistics reported that the headline PPI accelerated from the 2.4% YoY rate to 3.3% in July, surpassing expectations of a 2.5% by a wide margin.
- This overshadows the relatively cooler July Consumer Price Index (CPI) report released on Tuesday and suggests that a broad pickup in inflation is imminent. This, in turn, forced investors to temper bets for more aggressive interest rate cuts by the Federal Reserve, boosting the USD and triggering a sharp recovery of nearly 200 pips for the USD/JPY pair.
- Traders, however, are still pricing in around a 90% chance that the US central bank will lower borrowing costs by 25 basis points in September and the possibility of at least two rate cuts by the end of this year. This keeps a lid on any further recovery for the buck and further contributes to the USD/JPY pair’s modest decline during the Asian session on Friday.
- US President Donald Trump and Russian President Vladimir Putin are set to meet in Alaska on Friday to discuss how to end the war in Ukraine. The incoming headlines from the high-stakes summit will influence the broader market risk sentiment and drive the safe-haven JPY. This, along with the US macro data, should provide impetus to the currency pair.
- Friday’s US economic docket features the release of monthly Retail Sales figures, the Empire State Manufacturing Index, and the Preliminary University of Michigan Consumer Sentiment and Inflation Expectations Index. Apart from this, comments from FOMC members might contribute to producing short-term trading opportunities heading into the weekend.
USD/JPY bears might await sustained break below the 147.10-147.00 support
From a technical perspective, the USD/JPY pair’s overnight solid recovery from the 146.20 area falters just ahead of the 148.00 round figure. The said handle represents the 38.2% Fibonacci retracement level of the downfall from the 151.00 neighborhood, or the monthly peak, and should now act as a key pivotal point. A sustained strength beyond has the potential to lift spot prices to the 148.55-148.60 region, or the 50% retracement level. Some follow-through buying might shift the near-term bias in favor of bullish traders and pave the way for additional gains towards reclaiming the 149.00 round figure.
On the flip side, the 147.10-147.00 area now seems to protect the immediate downside, below which the USD/JPY pair could retest the multi-week low, around the 146.20 zone, touched on Thursday. Some follow-through selling, leading to a subsequent fall below the 146.00 round figure, will be seen as a fresh trigger for bearish traders and make spot prices vulnerable. The downward trajectory might then extend towards the next relevant support near the 145.40-145.30 region en route to 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.
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