Japanese Yen remains on the back foot ahead of the crucial BoJ policy meeting
- The Japanese Yen kicks off the new week on a weaker note, though the downside seems limited.
- Rising geopolitical tensions and hawkish BoJ expectations should lend some support to the JPY.
- Traders might also opt to move to the sidelines ahead of this week’s key central bank event risks.
The Japanese Yen (JPY) drifts lower for the second straight day on Monday, pushing the USD/JPY pair to the 144.75 area during the Asian session, albeit lacking follow-through. Expectations that the Bank of Japan (BoJ) might forego another interest rate hike this year, along with a generally positive tone around the equity markets, undermine the safe-haven JPY. Investors, however, seem convinced that the central bank will stick to the path toward policy normalization amid the broadening inflation.
This, along with rising geopolitical tensions in the Middle East, should help limit deeper JPY losses. Traders also seem reluctant and opt to wait for the crucial BoJ decision on Tuesday to determine the next leg of a directional move for the JPY. Investors this week will further take cues from the outcome of a two-day FOMC policy meeting on Wednesday, which will play a key role in influencing the near-term US Dollar (USD) price dynamics and providing some meaningful impetus to the USD/JPY pair.
Japanese Yen bulls remain on the sidelines ahead of the crucial BoJ decision on Tuesday
- The Bank of Japan is reportedly weighing a plan to reduce the pace of its Japanese government bond (JGB) purchases by half, starting in April 2026. The proposal is set to be discussed at the two-day policy meeting, which begins this Monday, and is expected to receive a majority backing from board members.
- Meanwhile, the BoJ is widely anticipated to hold its benchmark rate steady at 0.5% at the end of the June policy meeting on Tuesday. Policymakers, however, see slightly stronger inflation than they had anticipated earlier this year, which, in turn, could pave the way for future interest rate hike discussions.
- The growing market acceptance that the BoJ might push for tighter monetary conditions, along with trade-related uncertainties and a further escalation of geopolitical tensions in the Middle East, lends some support to the safe-haven Japanese Yen. This caps the USD/JPY pair's move higher on Monday.
- Israel struck Iran’s nuclear sites and key personnel last Friday, calling the operation necessary to counter an existential threat.
- Iran responded with hundreds of drones over the weekend and warned of further retaliation. This ramps up geopolitical uncertainty in the Middle East and favors the JPY bulls.
- The US Dollar, on the other hand, struggles to attract any meaningful buyers and remains close to a three-year low touched last week amid persistent trade-related uncertainties. Moreover, bets that the Federal Reserve will lower borrowing costs further in 2025 act as a headwind for the Greenback.
- Traders keenly await the crucial BoJ and Fed decisions on Tuesday and Wednesday, respectively, for cues about the future policy outlook and a fresh impetus. Nevertheless, the divergent BoJ-Fed expectations suggest that the path of least resistance for the USD/JPY pair is to the downside.
USD/JPY needs to surpass the trading range barrier near the 145.00 mark for bulls to seize control
From a technical perspective, the intraday move higher falters near the 144.75 region or a resistance marked by the top end of a multi-week-old trading range. Some follow-through buying, leading to a subsequent move beyond the 145.00 psychological mark, will be seen as a key trigger for bulls and lift the USD/JPY pair to the monthly swing high, around the 145.45 region. The momentum might then allow spot prices to reclaim the 146.00 round figure and extend further towards the 146.25-146.30 region, or the May 29 peak.
On the flip side, the 144.00 mark now seems to protect the immediate downside and any subsequent slide is more likely to attract some buying near the 143.55-143.50 region. A convincing break below the latter could drag the USD/JPY pair to the 143.00 round figure en route to Friday's swing low, around the 142.80-142.75 region and the lower boundary of the trading range, around mid-142.00s. Failure to defend the said support levels would set the stage for the resumption of the downtrend from the May monthly swing high.
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.