The Japanese Yen (JPY) held steady near its highest level since late September 2024, bolstered by a broadly weaker US Dollar (USD) and ongoing concerns about the escalating US-China trade war. The Yen’s strength is further fueled by growing optimism over a potential US-Japan trade deal and expectations that the Bank of Japan (BoJ) will continue to raise interest rates in 2025 due to persistent inflation pressures in Japan.
These factors contribute to a widening policy divergence between the BoJ and the Federal Reserve, with the latter facing mounting concerns over a potential US economic slowdown driven by tariffs. As a result, the USD remains near its lowest levels since April 2022, supporting a downtrend in the USD/JPY pair.
US-China Trade War Drives Safe-Haven Demand for Yen
The US-China trade war reached new heights last Friday when China raised tariffs on US goods to 125%, while the US imposed duties of up to 145% on Chinese imports. These developments have intensified fears about the economic consequences of the trade conflict, driving investors toward safe-haven assets like the Yen.
Additionally, market optimism surrounding US-Japan trade talks remains high. US President Donald Trump described the ongoing negotiations as tough but fair, while US Treasury Secretary Scott Bessent signaled that Japan may be prioritized in future tariff talks, further bolstering the JPY’s appeal.
Japanese Prime Minister Shigeru Ishiba expressed concern over the disruptive potential of US tariffs on the global economy, while Finance Minister Shunichi Kato emphasized the shared view between the US and Japan that excessive foreign exchange volatility should be avoided. Economy Minister Ryosei Akazawa stated that FX issues would be addressed through discussions between Kato and Bessent.
BoJ Rate Hike Expectations Strengthen Yen
The BoJ’s preliminary report, released last Thursday, revealed a sharp rise in annual wholesale inflation to 4.2% in March, indicating sustained cost pressures in Japan. Combined with robust wage growth, these inflationary signals suggest that the BoJ is likely to continue its rate hike cycle throughout the year.
In contrast, US inflation showed signs of slowing in March, with recent data highlighting a marked decrease in price pressures. This, along with weakening economic confidence in the US, suggests that the Federal Reserve may resume its rate-cutting cycle, with market participants now anticipating up to 90 basis points of rate cuts by year-end.
This divergence in monetary policy expectations—BoJ tightening versus the Fed potentially easing—further supports the JPY, with the USD languishing near its lowest point since April 2022. The JPY’s strength reinforces expectations that the USD/JPY pair will continue its multi-month downtrend.
Technical Outlook: USD/JPY Faces Key Support Levels
From a technical perspective, the USD/JPY pair is nearing critical support around the 142.00 mark, which could signal further declines if breached. A sustained break below this level could expose additional support zones around 141.65-141.60, with a potential extension towards the psychological 140.00 level.
Conversely, any recovery in the USD/JPY pair above the 143.00 mark would face resistance at 143.50-143.55. A decisive breakout above these levels could trigger a short-covering rally, pushing the pair toward the 144.00-144.50 range and eventually towards 145.00.
In the near term, caution is advised for bearish traders, as the daily Relative Strength Index (RSI) approaches oversold territory, suggesting a possible consolidation or brief bounce before any further downward movement.
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