- The Japanese yen has shown a notable recovery, moving past a month-long low against the US dollar.
- Expectations surrounding various Bank of Japan (BOJ) policies are giving the yen a significant boost.
- A generally weaker US dollar adds to the downward pressure on the USD/JPY pair.
The Japanese yen (JPY) is experiencing a strong rebound after the US dollar (USD) dropped to its lowest point since May 13. This recovery seems poised for continued momentum during Tuesday’s Asian trading session. The BOJ’s acknowledgment of rising market conditions, coupled with expectations for interest rate hikes in light of Japan’s increasing inflation, is a key factor in the yen’s relative strength.
Moreover, Japan’s Economic Minister Ryosei Akazawa noted that the country is optimistic about a US-Japan trade deal, making arrangements for his seventh visit to the US to support the yen. Meanwhile, the USD has been affected by predictions of interest rate cuts in July, following Monday’s mixed PMI data and dovish comments from Federal Reserve officials. As a result, USD/JPY pairs have dipped below the mid-145.00 range.
Japanese Yen Continues to Gain Amid Expectations of Further BOJ Rate Hikes
- Last week, the BOJ’s decision to slow bond purchases starting in fiscal year 2026 led investors to reassess their expectations for the next rate hike. Additionally, data released last Friday indicated that Japan’s core inflation rate hit a two-year high in May, staying above the BOJ’s 2% target for over three years.
- The release of Japan’s PMI forecast on Monday keeps the possibility of further rate increases by the BOJ next month open. At the same time, recent ministerial tariff negotiations stemming from the Canada-Japan-US Summit could further enhance the yen’s position.
- On the contrary, the US dollar is likely to continue its downward trend from the previous day’s high due to mixed PMI results and cautious comments from Federal Reserve officials. The S&P Global Flash Manufacturing PMI remained stable at 52 for June, while the services index cooled to 53.1 from 53.7, leading to a combined index drop to 52.8 from 53.0 in May.
- Adding to this, Fed Governor Michelle Bowman indicated that the time for interest rate cuts may be approaching quickly, expressing more concern about job market risks than inflation from tariffs. Chicago Federal President Austan Goolsbee noted the tariff surplus has had a more tempered impact on the economy than initially anticipated.
- This follows Fed Governor Christopher Waller’s statement last Friday that the US Central Bank should contemplate reducing rates in its next policy meeting on July 29-30. Currently, traders are pricing in a 58 basis point interest rate cut by the Fed this year, indicating that two 25 basis point cuts are likely, with a possibility of a third being added. This presents a sharp contrast with the more hawkish expectations from the BOJ.
- On the geopolitical front, US President Donald Trump announced a ceasefire agreement between Israel and Iran. While Israel has not confirmed, Iran’s foreign minister stated that Iran would also cease hostilities if Israel stops its attacks. This situation may keep optimism in check, along with ongoing trade uncertainties, favoring a safe JPY.
- Traders are eagerly anticipating Chairman Jerome Powell’s testimony in Congress. Additionally, upcoming US macro data, including the Conference Committee’s Consumer Trust Index and Richmond Manufacturing Index, may impact USD and influence the USD/JPY pair.
USD/JPY Might Further Decline Toward the Psychological Level of 145.00
From a technical perspective, the decline has brought the USD/JPY pair below the 100-hour simple moving average, but it’s hitting resistance before reaching the 50% retracement level of recent movements. The mixed indicators on hourly and daily charts suggest it might be wise to wait for a sustained break below support near the 145.40 area, which could lead to further losses toward the psychological mark of 145.00. This level could shift the balance in favor of bearish traders if decisively breached, prompting technical selling.
Conversely, the 146.00 round figure aligns with the 38.2% Fibonacci retracement level and now appears to be a significant immediate barrier. If the USD/JPY pair manages to break through, it may climb into the 146.70-146.75 area (23.6% Fibonacci level). Persistent buying pressure could push prices beyond the 147.00 mark, potentially reaching up to 148.00 and even 148.65 regions or targeting the monthly swing high around 147.40-147.45 as mid-level hurdles.
Bank of Japan FAQ
The Bank of Japan (BOJ) serves as the country’s central bank, managing monetary policy to issue currency and maintain price stability, with an inflation target of around 2%.
In 2013, the BOJ implemented an ultra-loose monetary policy to stimulate the economy and increase inflation in a low-growth environment. This included quantitative and qualitative easing, involving the purchase of assets like government and corporate bonds. In 2016, the bank introduced negative interest rates and further relaxed policies to manage government bond yields for the next decade. As of March 2024, the BOJ raised interest rates, moving away from its previously loose stance.
The yen previously depreciated significantly against major currencies due to expansive BOJ stimulus. This trend intensified in 2022 and 2023, driven by growing policy divergences between the BOJ and other major central banks. However, this trend saw a reversal in 2024 when the BOJ decided to shift away from its ultra-loose strategy.
Rising global energy prices, coupled with a weak yen, have driven Japan’s inflation above the BOJ’s 2% target. Expectations for salary increases, a key factor in fostering inflation, have also played a role in this shift.
