- The Japanese yen shows strength against the US dollar as it alleviates economic worries.
- JPY enthusiasts are dismissing political instability at home and a disappointing PMI report.
- The US dollar lingers near a multi-week low, adding pressure to the USD/JPY pair.
The Japanese yen (JPY) maintains a positive trend throughout the Asian trading session. Coupled with a generally weak US dollar (USD), the yen has either been stagnant around the 146.00 level or is expected to remain subdued for more than two weeks as Thursday unfolds. A recently signed trade agreement with Japan has helped reduce economic uncertainty, increasing expectations that the Bank of Japan (BOJ) may restart its tightening cycle later this year—an important factor lending support to the yen.
On the other hand, JPY supporters seem notably influenced by domestic political uncertainties and a disappointing release of Japan’s flash manufacturing PMI. Even in typical risk-on environments, this situation seldom mutes the generally bullish sentiment surrounding the safe-haven yen. At the same time, the dollar has dropped to its lowest level in over two weeks amid worries regarding potential Federal Reserve interest rate cuts.
Optimism in Trade Supports Japanese Yen
- It has been noted that the trade agreement between Japan and the US is likely to remove crucial negative factors affecting the domestic economy. Consequently, conditions for the BOJ to raise interest rates might soon be less stringent. Notably, the BOJ’s Lieutenant Governor reiterated this past Wednesday that the central bank would continue to pursue rate hikes as long as the economic and pricing situations align with expectations.
- Moreover, a Reuters survey indicates that most economists anticipate the BOJ will hike key rates again by year’s end. However, there’s a prevailing sentiment that the central bank might hold off on acting at this month’s meeting. Regardless, the renewed discussion around BOJ rate hikes will likely support the yen and pull USD/JPY pairs below the 146.00 threshold on Thursday.
- In contrast, Japan’s ruling coalition—including the Liberal Democrats (LDP) and their junior partner, Komeito—faced a setback in the recent Senate election. This development adds another layer of uncertainty and raises concerns about Japan’s financial well-being. Additionally, a private sector report revealed that manufacturing in Japan unexpectedly contracted in July.
- Specifically, the S&P Global Japan Manufacturing Purchasing Managers’ Index (PMI) dropped to 48.8 from June’s reading of 50.1, as companies assessed the ramifications of US tariffs. Although this casts a shadow over the generally positive outlook for the service sector—where the PMI jumped from 51.7 in June to 53.5 in July—it does fuel the market’s safe-haven demand for the yen.
- The US dollar finds it challenging to attract buyers due to worries over potential political interference jeopardizing Federal Reserve independence. President Trump has notably criticized Fed Chairman Jerome Powell for not lowering interest rates. US Treasury Secretary Scott Bescent mentioned that a candidate for the new Fed Chair is expected to be announced by December or January.
- The US economic calendar for Thursday, featuring weekly initial unemployment claims, flash PMI, and new home sales data, might influence USD price dynamics later in the North American session. Furthermore, decisions from the European Central Bank could create market fluctuations and boost demand for safe havens, impacting the USD/JPY pairing.
USD/JPY Appears Vulnerable Below the 100-SMA in the H4 Chart
From a technical perspective, the 100 Simple Moving Average (SMA) and a drop below the 146.00 level could be significant indicators of a bearish trend for USD/JPY. Moreover, daily chart oscillators are starting to show negative movement, further supporting potential declines. If there’s resistance below the 145.75 area, this could confirm a shift toward the 145.20-145.15 zone or the 61.8% Fibonacci retracement level, perhaps heading toward the psychological mark of 145.00.
On the downside, the break of the 100 SMA support is currently situated near the 146.60 area, aligning with the 38.2% Fibonacci level and providing key support. This retracement should act as a notable barrier, potentially lifting the USD/JPY pair towards the 147.00 mark. If surpassed, a rise towards the 147.20 area could follow, and breaking that might accelerate upward movement to the mid-range of 147.60-147.65, with a target near the 148.00 threshold.
- What is the Japanese Yen (JPY) based on?
- What role does the Bank of Japan play in controlling the Yen?
- How has the BOJ’s stance influenced currency policies?
- Why is the Japanese Yen considered a safe-haven currency?
The Japanese Yen (JPY) is among the most traded currencies globally, largely influenced by Japan’s economic performance, the Bank of Japan’s monetary policies, and the differences in bond yields between Japan and the US.
The Bank of Japan (BOJ) has the responsibility of currency control. Historically, it intervened directly in currency markets to reduce the yen’s value, though it often avoids frequent interventions due to political pressures from major trading partners. The BOJ’s extremely loose monetary policy from 2013 to 2024 resulted in a sustained depreciation of the yen against other currencies, but more recently, some support has emerged.
Over the last decade, the BOJ’s commitment to ultra-loose monetary policy has diverged considerably from other central banks, particularly the US Federal Reserve. This has widened the policy gap between US and Japanese bonds, reinforcing the US dollar’s strength against the yen. The BOJ’s actions in 2024, in conjunction with interest rate adjustments from other central banks, may close this gap.
The Japanese yen is often viewed as a safe-haven asset. During periods of market stress, investors tend to gravitate towards the yen due to its stability and reliability, potentially strengthening its value compared to riskier currencies.
