- The Japanese Yen attracts buyers for the second straight day amid reviving safe-haven demand.
- A modest USD downtick drags USD/JPY further away from a multi-week high touched on Friday.
- The BoJ’s dovish pause might cap JPY gains as the focus shifts to the FOMC meeting this week.
The Japanese Yen (JPY) remains on the front foot against a broadly weaker US Dollar (USD) for the second consecutive day and drags the USD/JPY pair back closer to the 144.00 mark during the Asian session on Monday. Heightened economic uncertainty in the wake of US President Donald Trump’s erratic trade policies, to a larger extent, overshadows signs of easing US-China trade tensions. Apart from this, geopolitical risks weigh on investors’ sentiment and drive some safe-haven flows towards the JPY.
Any meaningful JPY appreciation, however, seems limited amid the Bank of Japan’s (BoJ) dovish pause last Thursday. Traders might also refrain from placing aggressive USD bearish bets ahead of the crucial two-day FOMC policy meeting starting on Tuesday. This might contribute to limiting the downside for the USD/JPY pair, warranting caution before confirming that the recent bounce from a multi-month low has run out of steam. In the meantime, the US ISM Services PMI might provide some impetus on Monday.
Japanese Yen retains its positive bias amid reviving safe-haven demand, weaker USD
- China said last week it was evaluating the possibility of trade talks with the US, fueling hopes for the potential de-escalation of tensions between the world’s two largest economies. US President Donald Trump announced on Sunday a 100% tariff on all foreign-produced movies.
- Israeli Prime Minister Benjamin Netanyahu vowed to retaliate against Yemen’s Iran-aligned Houthi rebels firing a missile that landed near the Ben-Gurion Airport. In response, Iran’s Defence Minister Aziz Nasirzadeh said that Tehran would strike back if the US or Israel attacked.
- Russian President Vladimir Putin said in remarks published on Sunday that Russia had sufficient strength and resources to take the war in Ukraine to its logical conclusion. This keeps the geopolitical risk in play and drives safe-haven flows toward the Japanese Yen on Monday.
- The Bank of Japan surprised with dovish guidance last Thursday and forced investors to scale back their bets for a rate hike in June or July. However, the broadening inflation in Japan and prospects of sustained wage hikes keep the door open for further policy tightening by the BoJ.
- The US Dollar struggles to capitalize on Friday’s modest bounce that followed the upbeat US jobs data, which showed that the economy added 177K new jobs in April against 130K expected. Other details of the report showed that the Unemployment Rate remained unchanged at 4.2.
- The data pointed to a still resilient US labor market despite heightened economic uncertainty on the back of Trump’s tariffs and concerns about renewed price pressures. Traders pushed back their expectations about the resumption of the Federal Reserve’s rate-cutting cycle to July from June.
- This, however, still marks a big divergence in comparison to expectations for additional rate hikes by the BoJ in 2025 and should act as a tailwind for the lower-yielding JPY. The market focus now shifts to a two-day FOMC monetary policy meeting starting on Tuesday.
USD/JPY bears might now wait for break below the 143.75-143.70 before placing fresh bets
From a technical perspective, the USD/JPY pair last week struggled to find acceptance above the 50% Fibonacci retracement level of the March-April downfall and faced rejection near the 200-period Simple Moving Average (SMA) on the 4-hour chart. This makes it prudent to wait for some follow-through buying beyond the 146.00 mark before positioning for an extension of the recent goodish recovery move from a multi-month low. Spot prices might then climb to the 146.55-146.60 intermediate resistance before aiming to test the 61.8% Fibo. level, around the 147.00 neighborhood.
Meanwhile, oscillators on the daily chart still hold in positive territory, suggesting that any subsequent fall below the 144.00 mark might still be seen as a buying opportunity. This should help limit the downside near Friday’s swing low, around the 143.75-143.70 region, which if broken could make the USD/JPY pair vulnerable. The subsequent slide could drag spot prices to the 143.30 intermediate support en route to the 143.00 round figure and the 23.6% Fibo., around the 142.65 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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