- The Japanese Yen exhibited a lack of definitive direction during Wednesday’s trading session, influenced by a confluence of mixed fundamental signals.
- A prevailing positive sentiment in risk assets and disappointing macroeconomic data releases from Japan are limiting the potential for gains in the safe-haven JPY.
- Anticipation of further interest rate increases by the Bank of Japan (BoJ) in 2025 is providing underlying support for the JPY, particularly amidst subdued price action in the US Dollar.
The Japanese Yen (JPY) is trading with a slightly negative bias against the US Dollar for the second consecutive day on Wednesday, as a generally optimistic risk appetite appears to be diminishing demand for traditional safe-haven investments. The market’s risk-on sentiment was bolstered by news that US President Donald Trump signed an executive order aimed at mitigating the impact of new tariffs on the automotive industry. This, coupled with indications of potential progress in trade negotiations, has contributed to increased investor confidence. However, offsetting this positive sentiment, recent disappointing economic data from Japan is exerting downward pressure on the JPY.
Despite these headwinds, any significant depreciation of the JPY seems unlikely, as market participants may choose to remain on the sidelines in anticipation of the critical two-day Bank of Japan (BoJ) policy meeting commencing today. The BoJ is scheduled to announce its policy decision on Thursday, and the consensus expectation is that the central bank will maintain its current interest rate levels. This cautious approach is largely attributed to concerns about the potential adverse effects of US tariffs on Japan’s fragile economic recovery. Nevertheless, the increasing breadth of inflationary pressures within Japan suggests that the possibility of further BoJ policy normalization remains on the table, which, in turn, should provide a supportive backdrop for the JPY. Market analysts will be closely scrutinizing the BoJ’s forward guidance for any hints about the timing and magnitude of future policy adjustments.
Japanese Yen bulls remain cautious amid a positive risk tone, awaiting the BoJ decision on Thursday
- US President Donald Trump has signed an order designed to allow US automakers to reduce their import tax burden on foreign-sourced components. Furthermore, White House sources have indicated that parts originating from Canada and Mexico that comply with North American free trade regulations would be exempt from these tariffs.
- This development coincides with ongoing progress in trade negotiations and growing optimism regarding the potential for additional trade agreements, which collectively contribute to a positive risk environment. Indeed, US Treasury Secretary Scott Bessent stated earlier this week that numerous key US trading partners have submitted “very good” tariff proposals.
- Economic data released earlier on Wednesday revealed that Japan’s Industrial Production contracted by 1.1% in March, significantly exceeding expectations for a decline. In addition, Japan’s Retail Sales also fell short of consensus estimates, registering a year-over-year growth of 3.1% in March, thereby acting as a drag on the Japanese Yen.
- The Bank of Japan is commencing its policy meeting today, with the official announcement scheduled for Thursday. The prevailing expectation is that the central bank will adopt a measured approach and refrain from implementing further interest rate hikes, primarily due to escalating concerns that the newly imposed US tariffs could substantially impede Japan’s economic growth trajectory.
- Expectations beyond the April meeting remain divided, reflecting the mixed signals emanating from the Japanese economy. However, persistent inflationary pressures and substantial wage increases offered by major corporations this year provide the BoJ with greater flexibility to pursue further monetary policy tightening measures throughout the year. The central bank’s assessment of these factors will be crucial in determining the future course of monetary policy.
- Conversely, the disappointing US Job Openings and Labor Turnover Survey (JOLTS) data and the US Conference Board’s Consumer Confidence Index, both released on Tuesday, have strengthened the argument for a resumption of the Federal Reserve’s rate-cutting cycle in the coming months. These data points suggest a potential softening in the US labor market and consumer sentiment, which could prompt the Fed to ease monetary policy to support economic growth.
- Specifically, the US Bureau of Labor Statistics (BLS) reported a sharp decline in US job openings, falling to 7.19 million on the last day of March from a revised figure of 7.480 million (previously reported as 7.56 million) in the preceding month. This figure fell below market expectations of 7.5 million, indicating a potential slowdown in hiring activity.
- Adding to these concerns, the US Consumer Confidence Index plummeted to 86.0 in April, reaching a nearly five-year low, amid growing anxieties regarding the potential economic repercussions of Trump’s tariffs. Furthermore, both the Present Situation Index and the Expectations Index declined to 133.5 and 54.4, respectively, reflecting a deterioration in both current economic conditions and future outlook.
- The CME FedWatch Tool currently indicates a 65% probability of a 25 basis point (bps) rate cut by the Federal Reserve in June. Market participants are also pricing in as much as 100 bps in rate cuts by the end of the year, a key factor contributing to the US Dollar’s proximity to multi-year lows.
- Traders are now focusing on Wednesday’s key US economic releases, including the ADP report on private-sector employment, the Advance Q1 GDP estimate, and the Personal Consumption and Expenditure (PCE) Price Index. In addition, the US Nonfarm Payrolls report scheduled for release on Friday will provide further insights into the Federal Reserve’s policy outlook.
- In the interim, the diverging policy expectations between the BoJ and the Fed are expected to continue to provide a tailwind for the lower-yielding JPY and limit the upside potential for the USD/JPY currency pair. The contrast in monetary policy stances is likely to remain a significant driver of the exchange rate in the near term.
USD/JPY could accelerate the positive move once the 142.60-142.65 immediate hurdle is cleared decisively
From a technical perspective, the USD/JPY pair encountered resistance earlier this week, struggling to maintain its position above the 100-period Simple Moving Average (SMA) on the 4-hour chart and facing rejection near the 144.00 level. The subsequent decline and bearish oscillators on both hourly and daily charts support a short-term negative outlook. However, it remains prudent to await confirmation of further selling pressure below the 142.00 mark before establishing positions for more substantial losses. A break below this level could trigger an accelerated decline towards the mid-141.00s, potentially extending to the 141.10-141.00 region. The downward trajectory could then continue towards the 140.50 intermediate support level before the pair ultimately reaches the multi-month lows below the 140.00 psychological threshold observed last week.
Conversely, the 142.60-142.65 region is expected to serve as an immediate resistance level. A successful breach of this barrier could trigger a wave of short-covering, potentially propelling the USD/JPY pair beyond the 143.00 mark towards the next significant resistance zone near 143.40-143.45. Sustained strength above this latter level would suggest that the currency pair has established a near-term bottom and could pave the way for a more substantial upward movement. Acceptance above the 144.00 level would further reinforce this bullish scenario, indicating the potential for a meaningful upside trend.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
