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Japanese Yen stands firm as US-Japan trade deal revives BoJ rate hike bets

  • The Japanese Yen outperforms the USD as a deal with the US eases economic worries.
  • The JPY bulls largely shrug off domestic political uncertainty and disappointing PMIs.
  • The USD hangs near multi-week low and further exerts pressure on the USD/JPY pair.

The Japanese Yen (JPY) prolongs its uptrend against a broadly weaker US Dollar (USD) for the fourth straight day and jumps to an over two-week high during the Asian session on Thursday. The announcement of the US-Japan trade deal earlier this week eased market concerns about the potential economic fallout from higher tariffs and also seems to have revived bets for another interest rate hike by the Bank of Japan (BoJ) this year. This, in turn, is seen as a key factor underpinning the JPY.

Meanwhile, the JPY bulls seem rather unaffected by the domestic political uncertainty and the disappointing release of the flash Manufacturing PMI from Japan. Even the prevalent risk-on environment, bolstered by trade optimism, fails to dent the intraday bullish sentiment surrounding the safe-haven JPY. This, along with the prevalent USD selling bias amid the uncertainty over the Federal Reserve’s rate-cut path, suggests that the path of least resistance for the USD/JPY pair remains to the downside.

Japanese Yen bulls retain control as US-Japan trade deal reduces economic uncertainty

  • Japan’s trade deal with the US has removed a key downside risk for the domestic economy, suggesting that conditions for the Bank of Japan to hike interest rates further may start to fall in place. In fact, BoJ Deputy Governor Shinichi Uchida reiterated on Wednesday the central bank’s course of action to continue raising interest rates if the economy and prices move in line with forecasts.
  • Moreover, a Reuters poll showed that a majority of economists expect the BoJ to hike its key interest rate again by the year-end, though most expect the central bank could wait for some time and would stand pat at this month’s meeting. Nevertheless, reviving BoJ rate hike bets continues to underpin the Japanese Yen and drags the USD/JPY pair below the 146.00 mark on Thursday.
  • Meanwhile, Japan’s ruling coalition – the Liberal Democratic Party (LDP) and its junior partner Komeito – suffered a defeat in the upper house elections last weekend. This adds a layer of uncertainty and fuels concerns about Japan’s fiscal health. Adding to this, a private-sector survey showed on Thursday that Japan’s manufacturing activity unexpectedly slipped into contraction during July.
  • In fact, the S&P Global Japan manufacturing Purchasing Managers’ Index (PMI) dropped to 48.8 from June’s final reading of 50.1 as businesses assessed the impact of US tariffs. This, to a larger extent, overshadows the upbeat gauge for the services sector, which increases to 53.5 in July from 51.7 in the previous month. Apart from this, the upbeat market mood could cap the safe-haven JPY.
  • The US Dollar struggles to attract any buyers amid fears that the Federal Reserve’s independence could be under threat from mounting political interference. US President Donald Trump has been personally attacking Fed Chair Jerome Powell for not lowering interest rates. US Treasury Secretary Scott Bessent said that the new Fed Chair nominee is likely to be announced in December or January.
  • Thursday’s US economic docket – featuring the usual Weekly Initial Jobless Claims, the flash PMIs, and New Home Sales – might influence the USD price dynamics later during the North American session. Furthermore, the European Central Bank decision could infuse some volatility in the markets, which would drive the safe-haven demand and provide some impetus to the USD/JPY pair.

USD/JPY seems vulnerable while below 100-SMA support breakpoint on H4

From a technical perspective, an intraday breakdown below the 100-period Simple Moving Average (SMA) and the 146.00 mark could be seen as a key trigger for the USD/JPY bears. Moreover, oscillators on the daily chart have just started gaining negative traction and back the case for a further depreciating move. Some follow-through selling below the 145.75 area (July 10 low) will reaffirm the outlook and drag spot prices to the 145.20-145.15 region, or the 61.8% Fibonacci retracement level of the upswing in July, en route to the 145.00 psychological mark.

On the flip side, the 100-period SMA support breakpoint, currently pegged near the 146.60 area, which now coincides with the 38.2% Fibo. retracement level, should now act as an immediate strong barrier. A sustained strength beyond could lift the USD/JPY pair to the 147.00 round figure. This is closely followed by the overnight swing high, around the 147.20 area, which, if cleared, could allow spot prices to accelerate the move up towards the 147.60-147.65 intermediate hurdle en route to the 148.00 round figure.

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.