- The safe-haven Japanese Yen continues to be undermined by the upbeat market mood.
- The USD sits near a multi-week top set on Monday and also lends support to USD/JPY.
- The divergent BoJ-Fed expectations warrant caution before placing fresh JPY bearish bets.
The Japanese Yen (JPY) recovers slightly after touching a three-week trough against its American counterpart during the Asian session on Tuesday. Minutes of the Bank of Japan’s (BoJ) January meeting showed that policymakers discussed under what conditions the central bank should raise interest rates further, which, in turn, offers some support to the JPY. Furthermore, the recent sharp narrowing of the rate differential between Japan and other countries turns out to be another factor that helps limit deeper JPY losses.
Meanwhile, the global risk sentiment remains well supported by hopes that US President Donald Trump’s so-called reciprocal tariffs will be narrower and less strict than initially feared. Adding to this, the optimism over a possible Russia-Ukraine peace deal and China’s stimulus measures to stimulate consumption further boost investors’ confidence. This holds back the JPY bulls from placing aggressive bets, which, along with the recent US Dollar (USD) bounce from a multi-month low, acts as a tailwind for the USD/JPY pair.
Japanese Yen bulls remain on the sidelines amid positive risk tone; hawkish BoJ expectations to limit losses
- Reports on Sunday indicated that US President Donald Trump is planning a narrower, more targeted agenda for reciprocal tariffs set to take effect on April 2, fueling hopes for less disruptive tariffs and underpinning the risk sentiment.
- Talks between the US and Russian delegations concluded on Monday, and the discussion was centered around trying to reach a Black Sea maritime ceasefire deal. According to Russian state media, RIA, a joint statement is expected on Tuesday.
- Financial Times reports that China is considering including services in a multibillion-dollar subsidy program to stimulate consumption, further boosting investors’ confidence and driving flows away from the safe-haven Japanese Yen.
- The US Dollar climbed to a nearly three-week high on Monday in reaction to the better-than-expected release of the US Composite PMI – which rose to 53.5 in March from 51.6 in the previous month –and further lends support to the USD/JPY pair.
- Minutes of the Bank of Japan (BoJ) last policy meeting held in January showed most members agreed the likelihood of hitting the 2% inflation target had been rising. Moreover, policymakers discussed the pace of raising interest rates further.
- Meanwhile, BoJ Governor Kazuo Ueda said in the parliament on Monday that our policy purpose is to achieve stable prices and that the central bank will adjust the degree of monetary easing if the 2% inflation target is likely to be achieved.
- This comes on top of the growing acceptance that stronger wage growth could contribute to mounting domestic price pressures and keep the door open for more interest rate hikes by the BoJ, which should help limit further losses for the JPY.
- In contrast, the Federal Reserve signaled last week that it is likely to deliver two 25 basis points rate cuts by the end of 2025. Traders, however, are pricing in the possibility of three quarter-point rate cuts at June, July, and October meetings.
- Atlanta Fed President Raphael Bostic said on Monday that he anticipates slower progress on inflation in coming months and sees the central bank cutting benchmark interest rate only a quarter of a percentage point by the end of this year.
- Tuesday’s US economic docket features the release of the Conference Board’s Consumer Confidence Index, New Home Sales, and the Richmond Manufacturing Index. This, along with Fed speak, could influence the USD price dynamics.
- The focus, however, will remain glued to the Fed’s preferred inflation gauge – the US Personal Consumption Expenditure (PCE) Price Index on Friday – due on Friday, which will drive market expectations about the future rate-cut path.
USD/JPY is likely to attract dip-buyers at lower levens and find decent support near the 150.00 psychological mark
From a technical perspective, the overnight breakout above the 150.00 psychological mark and a subsequent move beyond last week’s swing high, around the 150.15 region, was seen as a key trigger for bullish traders. Moreover, oscillators on the daily chart have been gaining positive traction and support prospects for a further appreciating move for the USD/JPY pair. Hence, some follow-through strength beyond the 151.00 round figure, towards testing the monthly swing high around the 151.30 area, looks like a distinct possibility.
On the flip side, any corrective pullback might now attract fresh buyers near the 150.15 region, which should help limit the downside near the 150.00 mark. A convincing break below the latter, however, could drag the USD/JPY pair to the 149.30-149.25 intermediate support en route to the 149.00 round figure and the 148.70-148.65 horizontal zone. Failure to defend the said support levels will suggest that the recent recovery from a multi-month low has run out of steam and shift the near-term bias back in favor of bearish traders.
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.