Japanese Yen regains earlier losses against USD; BoJ announcement on Wednesday is still in the spotlight

• Japanese Yen is likely to start the week on a weak note, but its losses may be limited.
• Increasing geopolitical tensions along with expectations of a hawkish stance from the Bank of Japan (BOJ) could lend some support to the yen.
• Traders might prefer to take a step back due to the uncertainties surrounding this week’s major central bank events.

The Japanese Yen (JPY) is bouncing back slightly against a weaker US Dollar (USD), bringing the USD/JPY pair down to around the 144.00 mark, which is near the lower end of the daily range. There’s a growing belief that the BOJ will pursue policy normalization as inflation continues to rise, providing a boost for the yen. The escalating geopolitical tensions in the Middle East are also making the yen a more appealing safe haven.

Even so, the anticipated interest rate hike from the BOJ this year might limit the yen’s gains, especially with the stock market generally in a positive mood. This situation contrasts with the Federal Reserve’s expectations of initiating a rate reduction cycle in September. Consequently, investors may decide to adopt a wait-and-see approach ahead of important central bank meetings this week, specifically the BOJ and Fed meetings on Tuesday and Wednesday.

Japan’s Yen Gains from Hawkish Expectations and Geopolitical Risks

• The BOJ is reportedly contemplating a significant cut in Japanese government bonds (JGB) purchases by half come April 2026. This proposal is set to be discussed at a two-day policy meeting starting Monday, with expectations of majority support from board members.
• On Tuesday, the BOJ is anticipated to maintain its benchmark rate at 0.5%, although policymakers are noting inflation levels that are slightly stronger than they had previously anticipated.
• The emerging market acceptance of the BOJ potentially tightening financial conditions, coupled with rising trade-related uncertainties and geopolitical strife in the Middle East, is bolstering support for the safe-haven yen. This anticipation may push the USD/JPY pair higher on Monday.
• Last Friday, Israel conducted strikes on Iranian nuclear facilities and personnel, justifying these actions as necessary to address a significant threat.
• In response, Iran launched hundreds of drones over the weekend, signaling further retaliation. This development amplifies geopolitical uncertainties in the Middle East, making the yen more attractive to investors.
• The US dollar continues to struggle to find strong buyers and has lingered at low levels for nearly three years, partly due to ongoing trade uncertainties. Additionally, expectations of rate cuts in 2025 could add pressure on the dollar.
• Market participants are closely watching the BOJ and Fed decisions this week for indications regarding future policy directions and market drivers. Nevertheless, diverging expectations from the BOJ suggest that the USD/JPY pair may face downward pressure.

Potential for USD/JPY Downward Movement if 144.00 Level is Broken

Technically speaking, daytime movements are currently hovering near the 144.75 area, which is seen as resistance at the upper end of a trading range. If bullish momentum leads to movement above the psychological barrier of 145.00, it could trigger further buying momentum, bringing the USD/JPY pair up to monthly highs around 145.45. If this occurs, prices might also inch closer to the 146.00 mark and possibly extend to the 146.25-146.30 region—the peak from May 29th.

On the flip side, the 144.00 mark may serve as strong support against immediate declines, where additional drops could attract buyers around the 143.55-143.50 area. A decisive break below this could lead to a steep decline towards the 143.00 mark, roughly in line with the 142.80-142.75 region, which is near the lower boundary of the trading range around the mid-142.00s. Should these support levels fail, it could signal a resumption of the downtrend established from the monthly highs in May.