- The Japanese Yen ticks higher at the start of a new week amid reviving safe-haven demand.
- Expectations that the BoJ could pause further rate hikes could act as a headwind for the JPY.
- The divergent BoJ-Fed policy expectations should continue to benefit the lower-yielding JPY.
The Japanese Yen (JPY) attracts some buyers during the Asian session on Monday and for now, seems to have stalled a nearly one-week-old downtrend from a multi-month high touched against its American counterpart last week. Mixed signals from the US and China temper optimism over a quick resolution of the trade conflict between the world’s two largest economies, which, in turn, is seen driving some safe-haven flows towards the JPY. Apart from this, expectations that Japan will strike a trade deal with the US further underpin the JPY amid hopes for a US-Japan trade deal.
Meanwhile, traders now seem to have pushed back their expectations for an immediate interest rate hike by the Bank of Japan (BoJ) due to economic risks from US tariffs, which might hold back the JPY bulls from placing fresh bets. However, signs of broadening inflation in Japan keep the door open for more BoJ rate hikes in 2025. Moreover, this marks a big divergence in comparison to bets for more aggressive policy easing by the Federal Reserve (Fed), which keeps the US Dollar (USD) bulls on the defensive and should continue to act as a tailwind for the lower-yielding JPY.
Japanese Yen bulls look to regain control amid fading hopes for a quick US-China trade deal
- US Treasury Secretary Scott Bessent said on Sunday that he did not know if US President Donald Trump had talked to Chinese President Xi Jinping. Bessent added that he had interactions with his Chinese counterparts last week, but did not mention tariffs.
- Moreover, China has repeatedly denied that any trade talks are occurring with the US. This tempers hopes for a de-escalation of trade tensions between the world’s two largest economies and could underpin the safe-haven Japanese Yen at the start of a new week.
- Japan’s vice Finance Minister for International Affairs and top currency diplomat, Atsushi Mimura, denied a media report that Bessent had told Japanese Finance Minister Katsunobu Kato at a meeting last week that a weak US Dollar and a strong JPY are desirable.
- Meanwhile, Bessent said in an X post on Saturday that he had very constructive talks with his Japanese counterpart, fueling hopes for an eventual US-Japan trade deal. This turns out to be another factor acting as a tailwind for the JPY during the Asian session.
- Despite high inflation, the Bank of Japan is expected to move cautiously and pause further rate hikes amid concerns that the new US tariffs could shave off 0.5% of Japan’s GDP. The BoJ is anticipated to leave rates unchanged at its policy meeting this week.
- However, inflation remains above the 2% target for the third straight year and big firms continue to offer bumper pay hikes this year. This gives the BoJ headroom to tighten its monetary policy in 2025, which supports prospects for a further JPY appreciation.
- In contrast, traders are betting the Federal Reserve will resume its rate-cutting cycle in June and lower borrowing costs by a full percentage point by the end of this year. This fails to assist the US Dollar to build on last week’s bounce from a multi-year low.
- Meanwhile, North Korea confirmed on Monday that it has sent troops to fight for Russia in the war with Ukraine. Moreover, US Secretary of State Marco Rubio said the US might abandon its attempts to broker a deal if Russia and Ukraine do not make headway.
- This keeps geopolitical risk premium in play, which, along with the divergent BoJ-Fed policy expectations, suggests that the path of least resistance for the lower-yielding JPY is to the upside.
USD/JPY weakness below the 143.00 mark could attract some dip-buyers near the 23.6% Fibo. level
A sustained move beyond the 100-period Simple Moving Average (SMA) on the 4-hour chart will be seen as a key trigger for the USD/JPY bulls against the backdrop of last week’s breakout above the 23.6% Fibonacci retracement level of the March-April downfall. Oscillators on the 4-hour chart show positive traction, hinting at an intraday move up, but daily indicators have yet to confirm a positive bias and caution is still warranted. Hence, any subsequent strength beyond the 144.00 mark might confront stiff resistance near the 144.35 region, or the 38.2% Fibo. level. Some follow-through buying, however, should pave the way for some meaningful upside in the near term.
On the flip side, the 143.25 area, closely followed by the 143.00 round figure, now seems to protect the immediate downside. Any further slide might continue to attract some dip-buyers near the 142.60 area or the 23.6% Fibo. This should help limit the downside near the 142.25 support zone. However, a convincing break below the latter, leading to a subsequent break through the 142.00 round figure, could make the USD/JPY pair vulnerable to weaken further towards the mid-141.00s en route to the 141.10-141.00 region. The downward trajectory could extend further towards intermediate support near the 140.50 area and expose the multi-month low – levels below the 140.00 psychological mark touched last week.
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.
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