- The Japanese Yen strengthens against the USD for the second straight day on Wednesday.
- The prospects for further policy normalization by the BoJ continue to underpin the JPY.
- Softer US CPI lifts bets for two Fed rate cuts in 2025, weighing on the USD and USD/JPY.
The Japanese Yen (JPY) is exhibiting continued strength against the US Dollar (USD) for the second consecutive trading day on Wednesday. This bullish momentum has driven the USD/JPY currency pair down to the 147.00 level during the Asian trading session. Hawkish signals from Bank of Japan (BoJ) Deputy Governor Shinichi Uchida on Tuesday are reinforcing expectations of further policy normalization, providing a tailwind for the JPY and extending its recovery from a one-month low. Market participants are closely watching for any further indications from the BoJ regarding potential adjustments to its monetary policy framework.
Conversely, the release of softer-than-expected US consumer inflation data on Tuesday has fueled speculation that the Federal Reserve (Fed) may implement at least two interest rate cuts before the end of 2025. This development has placed downward pressure on the US Dollar (USD), which is trading below its highest level since April 10, and is further supporting the lower-yielding JPY. However, a generally positive market sentiment, buoyed by optimism surrounding a potential US-China trade truce for a period of 90 days, could limit further gains for the safe-haven JPY. Investors are assessing the potential impact of geopolitical developments on currency valuations.
Japanese Yen remains supported by bets that the BoJ will hike rates again in 2025
- Economic data released on Wednesday revealed that Japan’s Producer Price Index (PPI) increased by 0.2% in April. The year-over-year PPI rate was reported at 4%, a decrease from the 4.2% recorded in the previous month. Despite the release of this data, the Japanese Yen demonstrated minimal reaction, continuing to derive support from expectations of additional rate hikes by the Bank of Japan. Market analysts suggest that the PPI figures, while important, are being overshadowed by broader monetary policy considerations.
- Indeed, BoJ Deputy Governor Shinichi Uchida reaffirmed on Tuesday that the central bank remains prepared to raise interest rates further if the Japanese economy and price levels improve in line with current projections. Uchida also noted that Japan’s economic growth is anticipated to moderate to around its potential level before resuming a path of moderate expansion as overseas economies recover. These comments have solidified market expectations for continued policy normalization by the BoJ.
- Meanwhile, traders have scaled back their expectations for aggressive policy easing by the Federal Reserve amid diminishing concerns about a potential recession in the United States. However, investors are still pricing in approximately 56 basis points of rate cuts by the Fed this year, a view that was reinforced by the release of softer US consumer inflation figures on Tuesday. The market is carefully analyzing economic indicators to gauge the Fed’s future policy decisions.
- The US Bureau of Labor Statistics (BLS) reported that the headline Consumer Price Index (CPI) edged down to 2.3% year-over-year in April, compared to 2.4% in the previous month. The core CPI, which excludes volatile food and energy prices, increased by 2.8% on a yearly basis, aligning with consensus estimates. These figures suggest a gradual moderation in inflationary pressures within the US economy.
- This data has contributed to the US Dollar remaining subdued below its highest level since April 10, exerting downward pressure on the USD/JPY pair. However, optimism surrounding a potential US-China trade agreement may be preventing traders from taking on excessively bullish positions in the safe-haven JPY. The interplay between monetary policy expectations and geopolitical factors is influencing currency market dynamics.
- US President Donald Trump stated in a recent interview with Fox News that the relationship between the United States and China is “excellent.” This follows positive developments in US-China trade negotiations over the weekend, where both countries reportedly agreed to a 90-day pause in the trade war and a reduction in reciprocal tariffs. These developments have fostered a more positive outlook for global trade and economic growth.
USD/JPY could find decent support near the 23.6% Fibo., around the 146.60-146.55 area
From a technical analysis perspective, the recent breakout above the 200-period Simple Moving Average (SMA) on the 4-hour chart, coupled with positive readings from oscillators on the daily chart, suggests a favorable outlook for bullish traders. Consequently, any subsequent decline below the 147.00 level may be viewed as a buying opportunity near the 146.60-146.55 area, which represents the 23.6% Fibonacci retracement level of the strong recovery from the year-to-date low reached in April. However, a decisive break below this level could trigger technical selling, potentially dragging the USD/JPY pair down to the 146.00 level, followed by the 145.40 region (the 38.2% Fibonacci level) and the 145.00 psychological level. This is closely followed by the 144.80-144.75 area, coinciding with the 200-period SMA on the 4-hour chart. A decisive break below this level would negate the near-term positive bias.
Conversely, the 147.65 zone is currently acting as an immediate resistance level. A break above this level could propel the USD/JPY pair towards the 148.00 level, followed by the 148.25-148.30 region and a potential retest of the one-month peak around the 148.65 area reached on Monday. Sustained buying pressure beyond this level would signal a fresh bullish impetus, potentially lifting spot prices above the 149.00 level towards the 149.65-149.70 area and ultimately to the 150.00 psychological level.
Bank of Japan FAQs
The Bank of Japan (BoJ) serves as the central bank of Japan, responsible for formulating and implementing monetary policy within the country. Its primary functions include issuing banknotes and exercising control over currency and monetary matters to ensure price stability, which is defined as maintaining an inflation target of approximately 2%.
In 2013, the Bank of Japan initiated an ultra-loose monetary policy aimed at stimulating economic activity and fostering inflation in response to a prolonged period of low inflation. The bank’s policy framework is based on Quantitative and Qualitative Easing (QQE), which involves the creation of new currency to purchase assets, such as government and corporate bonds, to inject liquidity into the financial system. In 2016, the bank further intensified its policy easing efforts by introducing negative interest rates and directly managing the yield on its 10-year government bonds. However, in March 2024, the BoJ reversed course and raised interest rates, effectively signaling a departure from its ultra-loose monetary policy stance.
The Bank of Japan’s extensive stimulus measures led to a depreciation of the Yen against its major currency counterparts. This trend was amplified in 2022 and 2023 due to a growing divergence in monetary policy between the Bank of Japan and other major central banks, which opted to aggressively raise interest rates to combat inflation levels that had reached multi-decade highs. The BoJ’s policy resulted in a widening interest rate differential with other currencies, thereby reducing the value of the Yen. However, this trend partially reversed in 2024 when the BoJ decided to abandon its ultra-loose policy stance.
The combination of a weaker Yen and a surge in global energy prices contributed to an increase in Japanese inflation, which surpassed the BoJ’s 2% target. The prospect of rising wages within the country – a crucial factor driving inflation – also played a role in the decision to unwind the ultra-loose policy.
