By Areena Fx
The Japanese Yen retests the monthly swing low against its American counterpart.- Reduced bets for a BoJ rate hike in 2025 and trade uncertainties weigh on the JPY.
- A modest USD downtick weighs on USD/JPY ahead of the crucial FOMC decision.
The Japanese Yen (JPY) rebounds against a broadly weaker US Dollar (USD) following an Asian session downtick closer to the monthly low and for now, seems to have snapped a three-day losing streak. Investors remain on edge amid persistent trade-related uncertainties and rising geopolitical tensions, which, in turn, lend some support to the safe-haven JPY. However, a combination of factors might hold back the JPY bulls from placing aggressive bets.
The Bank of Japan (BoJ) signaled a cautious approach to unwinding its decade-long monetary stimulus amid economic growth uncertainties. This forced investors to push back their expectations about the likely timing of the next BoJ rate hike to Q1 2026. Moreover, US President Donald Trump and Japan’s Prime Minister Shigeru Ishiba failed to achieve a breakthrough on tariffs at the G7 summit, which could cap the JPY ahead of the crucial FOMC policy decision.
Japanese Yen benefits from a weaker USD and rising Middle East tensions
- The Bank of Japan, as was widely expected, left the benchmark rate unchanged at 0.5% on Tuesday amid rising growth risks and said that it will slow the pace of reductions in its government bond purchases from April next year. The BoJ added that Japan’s economic growth was likely to moderate and that accommodative financial conditions are expected to provide support.
- This reinforced market expectations that the central bank might forego another rate hike this year. In fact, a recent Reuters poll indicated that a slight majority of economists expect the next 25-basis-point rate increase in early 2026. This could undermine the Japanese Yen amid roadblocks on the trade front ahead of the July 9 deadline for higher reciprocal US tariffs.
- Japan’s Prime Minister Shigeru Ishiba, talking to reporters after the G7 summit on Tuesday, said that he and US President Donald Trump agreed to instruct their ministers to further engage in trade talks. Ishiba added that there are still some points on which the two sides are not on the same page, so we have not yet reached an agreement on the trade package.
- Meanwhile, Japan Machinery Orders fell 9.1% in April ––marking a sharp reversal from a 13% surge in March and the weakest reading since April 2020. Moreover, the monthly Reuters Tankan poll showed that Japanese manufacturers grew less confident about business conditions in June and expressed caution about the outlook for the next three months.
- From the US, the US Census Bureau reported on Tuesday that Retail Sales declined by 0.9% in May compared to a contraction of 0.7% expected. Adding to this, US Industrial Production also fell short of consensus estimates and contracted 0.2% in May, pointing to a softening economy and reaffirming bets for an interest rate cut by the Federal Reserve in September.
- The initial market reaction, however, turned out to be short-lived as rising geopolitical tensions in the Middle East drove safe-haven flows toward the US Dollar. Investors now look forward to the outcome of a two-day FOMC policy meeting for more cues about the future rate-cut path, which will drive the USD and provide a fresh impetus to the USD/JPY pair.
USD/JPY could attract dip-buyers near the 144.50-144.45 horizontal support
From a technical perspective, the overnight breakout and a daily close above the 145.00 psychological mark could be seen as a fresh trigger for the USD/JPY bulls. Moreover, oscillators on the daily chart have just started gaining positive traction and suggest that the path of least resistance for spot prices is to the upside. Some follow-through buying beyond the monthly swing high, around the 145.45 area, will affirm the constructive outlook and allow the pair to conquer the 146.00 round figure before aiming to test the 146.25-146.30 region or the May 29 peak.
On the flip side, any corrective pullback below the 145.00 mark might now attract some dip-buyers and find decent support near the 144.50-144.45 region, below which the USD/JPY pair could slide to the 144.00 mark. A convincing break below the latter would expose the next relevant support near the 143.55-143.50 region before spot prices eventually drop to the 143.00 round figure en route to last Friday’s swing low, around the 142.80-142.75 region.
Japanese Yen FAQs
What key factors drive the Japanese Yen?
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.
How do the decisions of the Bank of Japan impact the Japanese Yen?
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.
How does the differential between Japanese and US bond yields impact the Japanese 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.
How does broader risk sentiment impact the Japanese Yen?
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.