- The Japanese Yen attracts some buyers as strong domestic CPI reaffirms BoJ rate hike bets.
- Trade uncertainties and rising geopolitical tensions also benefit the JPY’s safe-haven status.
- A weaker USD contributes to the USD/JPY pair’s retracement slide from the monthly high.
The Japanese Yen (JPY) remains on the front foot against a weaker US Dollar (USD) through the Asian session, though it lacks follow-through and remains close to the monthly low touched on Thursday. Data released earlier this Friday showed that Japan’s annual National Consumer Price Index (CPI) remained well above the Bank of Japan’s (BoJ) target of 2% in May. This reaffirms market bets that the BoJ will hike interest rates again and provides a modest lift to the JPY.
Apart from this, persistent trade-related uncertainties and rising geopolitical tensions in the Middle East continue to weigh on investors’ sentiment, which turns out to be another factor underpinning the safe-haven JPY. However, reduced bets for a BoJ rate hike in 2025, along with concerns about the potential economic fallout from existing 25% US tariffs on Japanese vehicles and 24% reciprocal levies on other imports, keep a lid on any meaningful upside for the JPY.
Japanese Yen bulls seem non-committed amid the uncertainty over the timing of next BoJ rate hike
- The Japan Statistics Bureau reported this Friday that the headline National Consumer Price Index (CPI) rose by 3.5% YoY in May, compared to the previous reading of 3.6%. Meanwhile, the National core CPI, which excludes volatile fresh food prices, picked up from the 3.5% YoY rate in April and grew 3.7% last month – marking the highest level since January 2023.
- Further details revealed a core reading that excludes both fresh food and energy prices and is closely watched by the Bank of Japan as a gauge of underlying inflation rose 3.3% YoY in May from 3.0% in the prior month. Stronger CPI prints pointed to broadening inflationary pressures in Japan and gives the BoJ more impetus to hike interest rates in the coming months.
- However, the BoJ earlier this week signaled its preference to move cautiously in normalizing still-easy monetary policy and decided to slow the pace of reduction in its bond purchases from fiscal 2026. Adding to this, the gloomy economic outlook and the uncertainty over US President Donald Trump’s tariffs suggest that the BoJ could forgo hiking interest rates in 2025.
- The Federal Reserve, on the other hand, projected two rate cuts by the end of 2025, though officials forecast only one 25-basis points rate cut in each of 2026 and 2027. Furthermore, seven of the 19 policymakers indicated they wanted no cuts this year, up from four in March, amid persistent worries that the Trump administration’s tariffs could push up consumer prices.
- Meanwhile, Trump earlier this week said that tariffs on the pharma sector are coming soon. This adds a layer of uncertainty in the markets ahead of the July 9 deadline for higher reciprocal US tariffs. Adding to this, rising geopolitical tensions continue to weigh on investors’ sentiment, which, along with relatively hawkish BoJ expectations, underpins the Japanese Yen.
- On the geopolitical front, the Iran-Israel conflict enters its eighth day as Trump weighs US involvement in the war. According to the White House, Trump said that he will allow two weeks for diplomacy to proceed before deciding whether to launch a strike on Iran. European foreign ministers are slated to meet Iranian officials on Friday and press them to de-escalate.
USD/JPY constructive technical setup warrants some caution before positioning for deeper losses
From a technical perspective, the USD/JPY par’s back-to-back close above the 145.00 psychological mark this week, along with the overnight move beyond the previous monthly peak, around the 145.45 area, was seen as a fresh trigger for bulls. Moreover, oscillators on the daily chart have just started gaining positive traction and suggest that the path of least resistance for spot prices remains to the upside. Hence, any further pullback could be seen as a buying opportunity near the 144.50-144.45 area. This, in turn, should help limit losses near the 144.00 round figure. A convincing break below the latter, however, would negate the positive outlook and shift the near-term bias in favor of bearish traders.
On the flip side, the 145.75 area, or the monthly top touched on Thursday, could act as an immediate hurdle ahead of the 146.00 mark. This is closely followed by the May 29 peak, around the 146.25-146.30 region, above which the USD/JPY pair could aim to challenge the 100-day Simple Moving Average (SMA), currently pegged just ahead of the 147.00 round figure. Some follow-through buying might then pave the way for a move towards the 147.40-147.45 intermediate hurdle en route to the 148.00 mark and 148.65 region, or the May monthly swing high.
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: Japanese Yen sticks to intraday gains as strong inflation data revives BoJ rate hike bets
