Japanese Yen weakens amid fading safe-haven demand after Trump delays tariffs
- The Japanese Yen attracts fresh sellers amid fading safe-haven demand.
- Worries about Trump’s trade tariffs further seem to undermine the JPY.
- The divergent BoJ-Fed expectations should help limit losses for the JPY.
The Japanese Yen (JPY) drifts lower during the Asian session on Tuesday as US President Donald Trump's decision to delay plans to impose trade tariffs on Canada and Mexico dents demand for traditional safe-haven assets. Adding to this worries that Japan will also be an eventual target for Trump's tariffs further seem to undermine the JPY and lift the USD/JPY pair back closer to the mid-155.00s.
Any meaningful JPY depreciation, however, seems limited amid bets that the Bank of Japan (BoJ) will hike rates further. This marks a big divergence in comparison to expectations that the Federal Reserve (Fed) will lower borrowing costs twice by the end of this year. The resultant narrowing rate differential between Japan and the US should contribute to limiting losses for the lower-yielding JPY.
Japanese Yen is pressured by Trump’s decision to delay tariffs; BoJ rate hike bets favor bulls
- Investors took a sigh of relief after US President Donald Trump agreed to delay 25% trade tariffs against Canada and Mexico by 30 days, undermining the safe-haven Japanese Yen.
- Japan's Prime Minister Shigeru Ishiba is set to meet with Trump later this week and their conversation may provide more hints about the risk of tariffs as Japan has a large trade surplus with the US.
- Japan's Finance Minister Katsunobu Kato said on Monday that the government intends to monitor the impact of Trump's new tariffs on its currency amid worries about the potential economic fallout.
- Bank of Japan's Summary of Opinions released on Monday showed board members agreed that it will be necessary to continue hiking interest rates if economic activity and prices remain on track.
- Moreover, a rise in core inflation in Japan's capital city Tokyo, by the fastest annual pace in nearly a year, keeps alive expectations for further interest rate hikes by the Bank of Japan.
- The Institute of Supply Management's (ISM) Manufacturing Purchasing Managers' Index climbed from 49.3 in the previous month to 50.9 in January, beating expectations for a reading of 49.8.
- Additionally, the Prices Paid Index—which measures inflation—rose to 54.9 from 52.5, while the Employment Index increased to 50.3 from 45.4, and the New Orders Index improved to 55.1.
- This comes on top of speculations that Trump's trade tariffs could push up inflation and give the Federal Reserve less impetus to cut interest rates further, which underpins the US Dollar.
- The view was echoed by comments from Chicago Fed President Austan Goolsbee, who warned that uncertainty over Trump’s policies could delay the central bank’s plans to cut interest rates.
- Separately, Atlanta Fed President Raphael Bostic noted on Monday that although the US labor market remains surprisingly resilient, tariff threats throw a wrench in outlook expectations.
- Meanwhile, Fed governor Michelle Bowman said on Friday that rate cuts are still expected this year but added that future moves should be cautious and gradual, with time to assess data.
- Traders now look forward to the US economic data – Job Openings and Labor Turnover Survey (JOLTS) and Factory Orders – for short-term opportunities later during the North American session.
USD/JPY pair might continue to face stiff resistance and remain capped near the 156.00 mark
From a technical perspective, the USD/JPY pair might continue to confront stiff resistance near the 156.00 mark. This is closely followed by last week's swing high, around the 156.25 region, above which spot prices could climb to the 156.75 supply zone. Some follow-through buying, leading to a subsequent strength beyond the 157.00 round figure, will shift the bias in favor of bullish traders and pave the way for a move towards reclaiming the 158.00 mark with some intermediate hurdle near the 157.50 area.
On the flip side, weakness below the 155.00 psychological mark now seems to find support near the 154.65 region ahead of the 154.30 area, the 154.00 round figure, and the 153.70 zone, or over a one-month low touched in January. A convincing break below the said support levels could make the USD/JPY pair vulnerable to accelerate the fall towards the 153.00 mark en route to the 152.60-152.55 region and the 152.30 area. The latter represents the 100-day Simple Moving Average (SMA) and should act as a strong base for spot prices.
Japanese Yen FAQs
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.
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.
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.
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
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.
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.
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.
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.
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