• The Japanese Yen rallies across the board amid Trump’s tariff-inspired global flight to safety.
  • The narrowing of the US-Japan rate differential drives flows toward the lower-yielding JPY.
  • The divergent BoJ-Fed expectations support prospects for a further USD/JPY depreciation. 

The Japanese Yen (JPY) caught aggressive bids during the Asian session on Thursday amid the global flight to safety, triggered by US President Donald Trump's sweeping reciprocal tariffs. Investors grew increasingly concerned that the move could reshape the global trading system and impact negatively on the world economy, sending shockwaves through global financial markets. This, along with a broadly weaker US Dollar (USD), drags the USD/JPY pair to over a three-week low.

Meanwhile, investors now seem convinced that the Bank of Japan (BoJ) will raise rates further amid a broadening inflation in Japan. This marks a big divergence in comparison to expectations that the Federal Reserve (Fed) will resume its rate-cutting cycle soon amid a tariff-driven US economic slowdown. This would result in a further narrowing of the rate differential between Japan and the US, which supports prospects for a further appreciating move for the lower-yielding JPY.

Japanese Yen sticks to strong intraday gains amid a rush to safe-haven assets after Trump's tariffs

  • The global risk sentiment took a turn for the worst after US President Donald Trump unveiled reciprocal tariffs of at least 10% on all imported goods, sparking concerns over slowing global economic growth. 
  • Stock markets around the world plunged in reaction to the US tariffs announcement, lifting the safe-haven Japanese Yen to a three-week high against the US Dollar during the Asian session on Thursday. 
  • Japan's Prime Minister Shigeru Ishiba said that he will not hesitate to directly approach US president Trump if appropriate and will continue to demand US to reconsider tariff measures.
  • The anti-risk flow saw most global government bond yields fall, with the yield on the benchmark 10-year US government bond tumbling to the 4.0% neighborhood and hitting a fresh year-to-date low.
  • Traders lifted bets that the Federal Reserve will start lowering borrowing costs at the June policy meeting and deliver a total of three 25-basis-point reductions to the policy rate by the end of this year. 
  • This, to a larger extent, overshadows Wednesday's upbeat US ADP report, which showed that private-sector employers added 155K jobs in March, far more than the 105K expected and 84K previous.
  • Meanwhile, worries about the impact of harsher-than-expected US tariffs on Japan's economy forced investors to scale back their bets that the Bank of Japan would raise policy rate at a faster pace. 
  • However, the incoming macro data, including strong consumer inflation figures from Tokyo released last Friday, keeps the door open for further BoJ rate hikes, which, in turn, underpins the JPY. 
  • Traders now look forward to Thursday's US economic docket – featuring Weekly Initial Jobless Claims and the ISM Services PMI. The focus, however, will remain on trade-related developments.

USD/JPY technical setup supports prospects for a slide towards multi-month low, around 146.55-146.50

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From a technical perspective, the intraday slump below the 100-period Simple Moving Average (SMA) on the 4-hour chart comes on top of the recent breakdown through a multi-week-old ascending channel. This, along with bearish oscillators on the daily chart, supports prospects for a further near-term depreciation for the USD/JPY pair. Hence, a subsequent fall towards the 147.00 mark, en route to the 146.55-146.50 region or a multi-month low touched in March, looks like a distinct possibility.

On the flip side, any attempted recovery might now confront hurdle near the 148.00 mark. A sustained move, however, could trigger a short-covering rally towards the 148.65-148.70 region. That said, a further move up, is likely to attract fresh sellers near the 149.00 mark and cap the USD/JPY pair near the 149.35-149.40 region, or the 100-period SMA on the 4-hour chart. The latter should act as a key pivotal point, which if cleared might negate the negative outlook and pave the way for further gains.

Bank of Japan FAQs

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.

 

Source: Fxstreet