- The Japanese Yen draws support from BoJ rate hike bets and the global flight to safety.
- Trade jitters and escalating geopolitical tensions continue to benefit safe-haven assets.
- The divergent BoJ-Fed expectations also exert downward pressure on the USD/JPY pair.
The Japanese Yen (JPY) gains positive traction for the second straight day on Thursday and moves further away from a two-week low touched against its American counterpart the previous day. Investors now seem convinced that strong wage growth could boost consumer spending and contribute to rising inflation, giving the Bank of Japan (BoJ) more room to keep raising interest this year. This had been a key factor behind the recent narrowing of the rate differential between Japan and other countries, which continues to support the lower-yielding JPY.
Apart from this, the uncertainty over US President Donald Trump’s trade policies and geopolitical risks stemming from the ongoing conflicts in the Middle East turn out to be another factor underpinning the safe-haven JPY. The US Dollar (USD), on the other hand, languishes near a multi-month low touched earlier this week amid the prospects for further policy easing by the Federal Reserve (Fed). This, in turn, exerts additional downward pressure on the USD/JPY pair and contributes to the intraday slide back closer to the 148.00 round-figure mark.
Japanese Yen is underpinned by hawkish BoJ expectations and persistent safe-haven demand
- The Bank of Japan decided to keep its key policy rate steady at the end of a two-day review meeting on Wednesday and noted that the uncertainty surrounding Japan’s economy, and prices remains high.
- In the post-meeting presser, BoJ Governor Kazuo Ueda said that the central bank wants to conduct policies before it is too late and that achieving a 2% inflation target is important for long-term credibility.
- The Federal Reserve, as was widely anticipated, also held interest rates steady for the second meeting in a row and signaled that it is likely to deliver two 25 basis points rate cuts by the end of this year.
- Meanwhile, policymakers trimmed their growth forecast for the year amid the growing uncertainty over the impact of US President Donald Trump’s aggressive trade policies on economic activity.
- Furthermore, the Fed gave a bump higher to its inflation projection. Traders, however, still see over a 65% chance that the US central bank would resume its rate-cutting cycle at the June policy meeting.
- Ukrainian President Volodymyr Zelenskiy and Trump agreed to work together to end the Russia-Ukraine war. Russian President Vladimir Putin, however, rejected a proposed full 30-day ceasefire.
- The Israeli military said that it launched a limited ground incursion into Gaza, a day after an aerial bombardment of the strip that shattered the two-month-old ceasefire with Hamas.
- Israeli Prime Minister Benjamin Netanyahu warned of fierce war expansion, raising the risk of a further escalation of Middle East tensions and benefiting safe-haven assets, including the Japanese Yen.
USD/JPY seems vulnerable to slide further; bears await sustained break below the 148.00 mark
From a technical perspective, the overnight failure to find acceptance above the 150.00 psychological mark and the subsequent decline suggests that the recent bounce from a multi-month low has run out of steam. Moreover, negative oscillators on the daily chart support prospects for a further depreciating move for the USD/JPY pair. Hence, some follow-through weakness below the 148.00 mark, towards the next relevant support near the 147.75 horizontal support, looks like a distinct possibility. The downward trajectory could extend further towards the 147.30 region en route to the 147.00 round figure and the 146.55-146.50 area, or the lowest level since early October touched earlier this month.
On the flip side, any attempted recovery might now confront an immediate hurdle near the Asian session high, just ahead of the 149.00 mark. This is followed by the 149.25-149.30 supply zone, above which the USD/JPY pair could aim to reclaim the 150.00 mark. Some follow-through buying beyond the overnight swing high, around the 150.15 region, could prompt a short-covering rally and lift spot prices to the 150.60 intermediate barrier en route to the 151.00 mark and the monthly peak, around the 151.30 region.
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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