The Japanese yen is set to strengthen as BOJ’s Tankan survey boosts rate hike expectations.

• The market sentiment is generally positive, but US trade talks on food tariffs are pressuring the yen.
• With policy expectations rising in varying BOJs, there may be attempts to recover USD/JPY rates.

The Japanese Yen (JPY) shows a positive trend against the bearish US dollar (USD), currently hovering near its lows for the past three weeks during this Tuesday session. The Bank of Japan’s (BOJ) Tankan survey has revealed an uptick in business confidence among large manufacturers for the first time in two quarters, from April to June. Additionally, firms anticipate consumer prices exceeding the central bank’s 2% annual target in the next five years. This outlook has significantly bolstered hopes for further interest rate hikes by the BOJ, aiding the JPY.

On another note, US President Donald Trump has proposed additional tariffs on Japan, which Akihabara Kawashima, Japan’s chief trade negotiator, believes could severely impact the economy. This adds another headwind for the JPY, even as the broader equity market remains upbeat. The USD is lingering near multi-year lows, as the inevitability of the Federal Reserve potentially starting a rate-cutting cycle gains traction. This dynamic continues to push the USD/JPY pair down into the mid-143.00s.

Japan’s yen remains firm amid diverging BOJ policies

• The Tankan survey from the BOJ reveals an increase in business confidence from 12.0 to 13.0 in Q2, surpassing the market estimate of 10.0. The outlook for large manufacturing also came in at 12.0, strong compared to the expected 9.0.
• Details show that businesses expect prices to increase by 2.4% over the next three years, and by 2.3% yearly for five years. This suggests rising inflationary pressure, implying the BOJ may need to raise rates further, providing a lift for the yen during Asian trading hours.
• Japan’s chief negotiator, Ryosei Akazawa, has just returned from Washington after another round of talks without a major breakthrough. Yet, he maintains a strong commitment to reaching a fair agreement for Japan’s economic interests. President Trump has voiced his frustration with the stalled negotiations.
• Trump mentioned the possibility of a 25% tariff on Japanese cars, also expressing anger over Japan’s reluctance to buy US-grown rice. He has hinted at possibly halting trade talks with Tokyo, threatening increased tariffs until the July 9 deadline.
• The US dollar has seen a decline of 2.6% in June, with ongoing dovish expectations regarding the Federal Reserve’s next steps. The market is currently pricing in about a 74% chance of a rate cut in September.
• In a related development, the Senate narrowly approved a procedural vote to open discussions on Trump’s comprehensive bill, which further pressures the USD and weighs heavily on the USD/JPY pair.
• Traders are eyeing important US macroeconomic data set to be released at the start of the new month, particularly the closely followed US Non-Farm Payroll (NFP) report on Friday.

USD/JPY is vulnerable below the 200-SMA around the 144.40 area

From a technical perspective, a downturn below last week’s slower swing around the 143.75 mark could signal bearish momentum for USD/JPY traders. The recent drop below the 200 Simple Moving Average (SMA) on the 4-hour chart adds to this. Moreover, oscillators on both the 4-hour and daily charts show negative momentum, suggesting a likely downward path for spot prices. A move towards the 143.00 level, approaching support around 142.75-142.70, seems plausible.

On the flip side, the 144.00 round number may pose a barrier to recovery attempts. Any rise beyond this point could be viewed as a selling opportunity, especially as it coincides with the 200-period SMA on the 4-hour chart, currently near 144.40. However, sustained strength above this could initiate short-term rallies and allow the price to reclaim the psychological 145.00 mark.