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Japanese Yen strengthens further; drags USD/JPY below 140.00 for the first time since September

  • The Japanese Yen continues to attract safe-haven flows amid persistent trade-related uncertainties.
  • BoJ rate hike bets also lend support to the JPY and weigh on the USD/JPY pair amid a weaker USD.
  • Trump’s threat to the Fed’s independence keeps the USD on the defensive near a multi-year trough.

The buying interest around the Japanese Yen (JPY) remains unabated through the Asian session on Tuesday, which, along with a broadly weaker US Dollar (USD), momentarily drags the USD/JPY pair below the 140.00 psychological mark in the last hour. Uncertainties surrounding US President Donald Trump’s tariff policies and worries that an all-out trade war would trigger a global economic recession continue to boost demand for traditional safe-haven assets, including the JPY.

Furthermore, the growing acceptance that the Bank of Japan (BoJ) will raise interest rates again in 2025 underpins the JPY. The USD, on the other hand, languishes near a multi-year low amid the weakening investors’ confidence in the US economy on the back of Trump’s back-and-forth tariff announcements and doubts about the Federal Reserve’s (Fed) independence. This, along with Fed rate cut bets, keeps the USD bulls on the defensive and benefits the lower-yielding JPY.

Japanese Yen remains well bid as investors rush to safety amid recession fears

  • Following the first Japan-US negotiations last week, Japan’s Economic Revitalization Minister Ryosei Akazawa said that any agreement would likely take some time as it’s difficult to say how long it will take to bridge the gap between the two sides.
  • Akazawa added that agriculture will not be compromised to protect the auto industry in US tariff talks. Meanwhile, Japan’s Finance Minister Katsunobu Kato will meet US Treasury Secretary Scott Bessent later this week to discuss currency rates.
  • In its quarterly review of regional economic conditions across the country, the Japanese government maintained its overall economic assessment, warning of increasing downside risks due to US trade policies, per Xinhua News Agency.
  • Investors remained on edge amid the uncertainty over US President Donald Trump’s steep tariffs and the effect of the erratic trade war on the global economy. Moreover, Trump’s fresh attack on Federal Reserve Chair Jerome Powell rattled markets.
  • Trump accused Powell of not moving fast enough to bring down interest rates. Powell last week said that the central bank was not inclined to cut interest rates in the near future amid the possible inflationary pressures stemming from the new tariffs.
  • Meanwhile, White House economic adviser Kevin Hassett has suggested that Trump and his team are studying if they could fire Powell. This raises doubts over the independence of the central bank and keeps the US Dollar bulls on the defensive.
  • The Bank of Japan is reportedly planning to signal next week that there is almost no need to change its basic stance on raising interest rates as the potential impact of increased US tariffs will not disrupt the ongoing cycle of wage growth and inflation.
  • This marks a big divergence in comparison to expectations that the Fed will resume its rate-cutting cycle in June and lower borrowing costs by one full percentage point by the end of this year. This should further benefit the lower-yielding JPY.
  • Traders now look forward to the release of the Richmond Manufacturing Index from the US later this Tuesday. This, along with speeches from influential FOMC members, will drive the USD and provide short-term impetus to the USD/JPY pair.
  • The focus will then shift to the global flash PMIs on Wednesday, which would offer a fresh insight into the global economic health. Apart from this, trade-related developments will play a key role in driving the market sentiment and the JPY demand.

USD/JPY could extend the downfall towards testing the 2024 low, around 139.60-139.55

From a technical perspective, the slightly oversold daily Relative Strength Index (RSI) is holding back traders from placing fresh bearish bets around the USD/JPY pair. Any subsequent move up, however, is likely to confront stiff resistance near the 141.65-141.60 horizontal support breakpoint. That said, a sustained strength above could trigger a short-covering rally and lift spot prices beyond the 142.00 round figure, toward the next relevant hurdle near the 142.35-142.40 region.

On the flip side, the 140.45 area, or the multi-month low touched on Monday, now seems to protect the immediate downside, below which the USD/JPY pair could accelerate the fall toward the 140.00 psychological mark. The downward trajectory could extend further towards challenging the 2024 yearly swing low, around the 139.60-139.55 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.