Japanese Yen retreats from two-month high touched against USD on Friday

The Japanese Yen is pressured by renewed worries about Trump’s trade tariffs.
A modest USD strength provides a goodish lift to the USD/JPY pair on Monday.
The divergent BoJ-Fed policy expectations should help limit deeper JPY losses.

The Japanese Yen (JPY) attracts some sellers at the start of a new week as US President Donald Trump's tariff threats revive fears that Japan would also be an eventual target of new US levies. Apart from this, a modest US Dollar (USD) strength, lifts the USD/JPY pair to the 152.00 mark during the Asian session. Against the backdrop of the upbeat US jobs report released on Friday, expectations that Trump's policies could boost inflation and limit the scope for the Federal Reserve (Fed) to ease policy provide a modest lift to the Greenback.

Any meaningful JPY depreciation, however, seems elusive in the wake of the growing acceptance that the Bank of Japan (BoJ) will hike interest rates again this year, which continues to push Japanese government bond (JGB) yields higher. The resultant narrowing of the rate differential between Japan and other major central banks should, in turn, limit the downside for the lower-yielding JPY. Hence, it will be prudent to wait for strong follow-through JPY selling before confirming that the USD/JPY pair has bottomed out in the near term.

Japanese Yen bulls turn cautious amid Trump’s fresh tariff threats

US President Donald Trump said on Sunday that he will announce an additional 25% tariffs on all steel and aluminum imports into the US, and will also announce reciprocal duties over what he sees as unfair trading practices.
Worries that Trump's protectionist policies would put upward pressure on inflation, along with Friday's upbeat US job data, should allow the Federal Reserve to keep rates on hold, which, in turn, boosts the US Dollar.
The closely-watched US Nonfarm Payrolls (NFP) report showed that the Unemployment Rate declined to 4% from 4.1% and Average Hourly Earnings rose more than expected by 4.1% during the reported month.
Other details of the publication revealed that the number of employed people rose by 143,000 in January compared to the 170,000 expected and the 307,000 increase (revised from 256,000) recorded in the previous month.
The International Monetary Fund (IMF) warned last week that Japan should remain alert to potential spillover effects from rising volatility in global markets that could affect liquidity conditions for its financial institutions.
The IMF added that Japan needs to be vigilant about monitoring any fallout from the Bank of Japan's rate hikes, such as an increase in the government's debt-servicing costs and a possible jump in corporate bankruptcies.
Kazuhiro Masaki, Director General of the BoJ's monetary affairs department, said last Thursday that the central bank will continue to raise interest rates if underlying inflation accelerates toward its 2% target as projected.
This comes on top of data showing that Japan’s inflation-adjusted real wages rose 0.6% year-on-year in December – marking the second consecutive monthly gain – and backs the case for further tightening by the BoJ.
The view was echoed in the Summary of Opinions from the BoJ's January meeting, which revealed that board members had discussed the likelihood of raising interest rates further and should support the Japanese Yen.

USD/JPY could face stiff resistance near the 152.45-152.50 confluence

Technical indicators on the daily chart are holding deep in negative territory and are still away from being in the oversold zone. Apart from this, last week's breakdown below the 152.50-152.45 confluence – comprising the 100- and the 200-day Simple Moving Averages (SMAs) – favors bearish traders. Hence, any subsequent move-up is more likely to attract fresh sellers and remain capped near the said confluence support breakpoint. Some follow-through buying, however, might trigger a short-covering move and allow the USD/JPY pair to reclaim the 153.00 round figure.

On the flip side, the Asian session low, around the 151.25 area, now seems to protect the immediate downside ahead of the 151.00-150.95 area, or the lowest level since December 10 touched on Friday. Acceptance below the latter could drag the USD/JPY pair below the 150.55-150.50 intermediate support, toward the 150.00 psychological mark. The downward trajectory could extend further towards the 149.60 horizontal support en route to the 149.00 mark and the December swing low, around the 148.65 region.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

Tariffs FAQs

What are tariffs?

Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.

What is the difference between taxes and tariffs?

Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.

Are tariffs good or bad?

There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.

What is US President Donald Trump’s tariff plan?

During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.