Market Data 
- The Japanese Yen surrenders a major part of its intraday gains against its American counterpart.
- The BoJ’s hawkish outlook and the narrowing US-Japan yield differential favor the JPY bulls.
- Fed rate cut bets could act as a headwind for the buck and cap the upside for the USD/JPY pair.
The Japanese Yen (JPY) struggles to capitalize on modest Asian session gains and is currently placed near the lower end of the daily range against its American counterpart. The White House said that Colombia has agreed to accept illegal migrants returned from the US, which turns out to be a key factor exerting some downward pressure on the safe-haven JPY. Apart from this, the emergence of some US Dollar (USD) dip-buying lifts the USD/JPY pair to the 156.00 neighborhood.
That said, persistent uncertainty surrounding US President Donald Trump’s trade policies could act as a tailwind for the safe-haven JPY. Adding to this, the Bank of Japan’s (BoJ) hawkish outlook should act as a tailwind for the JPY. Furthermore, bets that the Federal Reserve (Fed) will cut rates twice this year should cap the USD gains. This, along with the recent narrowing of the US-Japan rate differential, favors the JPY bulls and should contribute to keeping a lid on the USD/JPY pair.
Japanese Yen downside potential seems imited amid trade war fears, hawkish BoJ
- US President Donald Trump imposed 25% tariffs on all imports from Colombia after the latter refused to allow two US military planes carrying deported migrants to land in the country.
- Trump warned that the tariffs will increase to 50% by next week on further noncompliance, fueling trade war concerns and boosting demand for the traditional safe-haven Japanese Yen.
- Adding to this, the Wall Street Journal (WSJ) reported that momentum is growing among Trump’s advisers to place 25% tariffs on Mexico and Canada as soon as February 1.
- The White House confirmed on Monday that Colombia has agreed to all of Trump’s terms, including unrestricted acceptance of all illegal aliens from Colombia returned from the US.
- The anti-risk flow, along with Federal Reserve rate cut bets, drags the US Treasury bond yields lower, narrowing the US-Japan yield differential and lending additional support to the JPY.
- The Bank of Japan decided to raise interest rates by 25 basis points, the biggest rate hike since February 2007, from 0.25% to 0.50%, or the highest since the 2008 global financial crisis.
- The BoJ reiterated that it would continue to raise the policy rate and adjust the degree of monetary accommodation if the outlook presented at the January policy meeting is realized.
- The BoJ does not expect consumer inflation to drop under its 2% target anytime soon and forecast slower growth, though it signaled that rising wages could fuel a ‘virtuous cycle’ of growth.
- Data released on Friday showed that Japan’s core consumer inflation accelerated to the fastest annual pace in 16 months during December, pointing to broadening inflationary pressure.
- Annual spring wage negotiations kicked off in Japan, with the leaders of the top business lobby and labor unions agreeing on the need to maintain the momentum for pay hikes.
- Traders now look to Monday’s US economic docket – featuring Durable Goods Orders, the Conference Board’s Consumer Confidence Index and the Richmond Manufacturing Index.
USD/JPY is likely to attract fresh buyers and remain capped near the 156.75 supply zone
From a technical perspective, any subsequent fall might continue to find support near the lower boundary of a multi-month-old ascending channel, currently pegged near the 155.25 region. This is closely followed by the 155.00 psychological mark and the 154.80-154.75 support, which if broken decisively will be seen as a fresh trigger for bearish traders. Given that oscillators on the daily chart have just started gaining negative traction, the USD/JPY pair might then accelerate the fall towards the 154.00 round figure en route to mid-153.00s and the 153.00 mark.
On the flip side, any attempted recovery might now confront some resistance near the 156.00 mark. The next relevant hurdle is pegged near the 156.75 supply zone. Some follow-through buying, leading to subsequent strength beyond the 157.00 mark, should pave the way for a move towards the 157.55 area en route to the 158.00 mark. The USD/JPY could eventually climb to the 158.35-158.40 region before aiming to retest the multi-month peak, around the 159.00 neighborhood touched on January 10.
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.
