- The Japanese Yen attracts sellers for the second straight day due to a positive risk tone.
- Bets for more interest rate hikes by the BoJ should help limit deeper losses for the JPY.
- The divergent BoJ-Fed expectations should contribute to capping gains for USD/JPY.
The Japanese Yen (JPY) struggles to capitalize on a modest Asian session uptick and turns lower for the second consecutive day against its American counterpart on Wednesday. The optimism over a delay in the implementation of Trump’s reciprocal tariffs and talks aimed at ending the Russia-Ukraine war remains supportive of a positive tone around the equity markets. This, in turn, is seen as a key factor undermining the safe-haven JPY, which, along with a modest US Dollar (USD) uptick, assists the USD/JPY pair to rebound around 40 pips from the daily low.
Any meaningful JPY depreciation, however, seems elusive in the wake of rising bets that the Bank of Japan (BoJ) will hike interest rates further amid signs of broadening inflation. Meanwhile, hawkish BoJ expectations led to the recent significant rise in Japanese bond yields. The resultant narrowing of the rate differential between Japan and other countries supports prospects for the emergence of some JPY dip-buying. This, in turn, warrants some caution before placing aggressive bullish bets around the USD/JPY pair ahead of the release of the FOMC minutes later today.
Japanese Yen bulls have the upper hand amid hawkish BoJ expectations
- Bank of Japan Governor Kazuo Ueda and Deputy Governor Himino recently signaled the possibility of another rate hike if the economy and prices align with the projections.
- Adding to this, BoJ Board Member Hajime Takata said on Wednesday that the central bank must gradually shift policy to avoid upside price risks from materializing.
- Moreover, Japan’s upbeat Q4 Gross Domestic Product (GDP) print on Monday boosted bets for further policy tightening by the BoJ amid signs of persistently high inflation.
- The International Monetary Fund estimates Japan’s neutral rate to be between 1% and 2%, and anticipates the BoJ to raise rates to around the mid-point of 1.5% by the end of 2027.
- The yield on the benchmark 10-year Japanese government bond reached levels not seen since 2010 earlier this week, which should continue to underpin the Japanese Yen.
- Officials from the US and Russia held a crucial meeting in Saudi Arabia to discuss ways to halt the almost three-year-old war in Ukraine and also agreed to hold more talks.
- Furthermore, a delay in the implementation of US President Donald Trump’s reciprocal tariffs remains supportive of a positive risk tone and undermines the safe-haven JPY.
- Market participants now look forward to the release of minutes of the Federal Reserve’s latest policy meeting in January for fresh cues about the future interest rate-cut path.
USD/JPY could attract fresh supply and remain capped near the 200-day SMA
From a technical perspective, any subsequent move up is more likely to face stiff resistance near the 200-day Simple Moving Average (SMA), currently pegged near the 152.65 region. This is followed by the 153.00 mark and the 100-day SMA barrier, around the 153.30-153.35 zone, which if cleared decisively should pave the way for additional gains. The USD/JPY pair might then accelerate the positive move towards reclaiming the 154.00 mark en route to the 154.45-154.50 supply zone, last week’s swing high, around the 154.75-154.80 region, and the 155.00 psychological mark.
On the flip side, weakness below the 151.75 area, or the Asian session trough, could extend towards the overnight swing low, around the 151.25 region. Some follow-through selling, leading to a subsequent breakdown below the 151.00 mark, will be seen as a fresh trigger for bearish traders. The USD/JPY pair might then accelerate the fall towards the 150.60 intermediate support before eventually dropping to the 150.00 psychological mark. The downward trajectory could extend further towards the 149.60-149.55 region en route to the 149.00 mark and the December 2024 low, around the 148.65 region.
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.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
Source: https://www.fxstreet.com/news/japanese-yen-remains-on-the-back-foot-amid-a-positive-risk-tone-downside-seems-limited-202502190244