Japanese Yen pulls back from one-week high against USD; bullish bias remains

• The Japanese Yen attracts some intraday sellers amid a combination of negative factors.

• Calls for the BoJ to slow tapering beyond 2026 and a positive risk tone undermine the JPY.

• The divergent BoJ-Fed policy expectations should cap any meaningful upside for the pair.

The Japanese Yen (JPY) retreated sharply from a one-week low touched against its American counterpart during the Asian session on Tuesday. Comments from a former Bank of Japan (BoJ) board member Makoto Sakurai, along with requests made at a meeting between the central bank and financial institutions on May 20-21, suggest that the BoJ might proceed slowly in reducing its balance sheet. Furthermore, this underscores the challenge the BoJ faces in removing its massive monetary stimulus. Adding to this, a modest recovery in the global risk sentiment prompts traders to lighten their JPY bullish bets.

Any meaningful JPY depreciation, however, still seems elusive in the wake of the growing acceptance that the BoJ will continue raising interest rates amid the broadening inflation in Japan. The bets were reaffirmed by BoJ Governor Kazuo Ueda's remarks in the Japanese parliament. This, along with rising trade and geopolitical tensions, could support the safe-haven JPY. Meanwhile, hawkish BoJ expectations mark a big divergence in comparison to the market pricing of at least two rate cuts by the Federal Reserve (Fed) this year, which should cap any US Dollar (USD) recovery and benefit the lower-yielding JPY.

Japanese Yen bulls opt to take some profits off the table; downside potential seems limited 

A former Bank of Japan board member Makoto Sakurai said this Tuesday that the central bank is expected to halt its quarterly reductions in government bond purchases starting next fiscal year. Sakurai noted that authorities are concerned that continued reductions could push yields higher, making it harder to manage the economy and government debt.

Minutes of a meeting between the BoJ and financial institutions held in May revealed that the central bank received a sizable number of requests to maintain or slightly slow the pace of tapering in its bond purchases from fiscal year 2026. The BoJ will conduct a review of its current taper plan at its next monetary policy meeting scheduled on June 16-17.

BoJ Governor Kazuo Ueda reiterated earlier today that the central bank will continue to raise interest rates if the economy and prices move in line with forecasts. Ueda, however, cautioned that it is important to make a judgment without any preset ideas as uncertainties over overseas trade policies and economic situations remain extremely high.

Meanwhile, the current market pricing indicates around a 70% chance that the Federal Reserve will deliver at least two 25 basis points interest rate cuts by the end of this year. Moreover, Chicago Fed President Austan Goolsbee said on Monday that the US central bank would lower short-term rates once the uncertainty surrounding tariff policies is resolved.

On the economic data front, the Institute for Supply Management (ISM) survey published on Monday showed that economic activity in the US manufacturing sector contracted for a third straight month in May. The ISM Manufacturing PMI receded to 48.5 from 48.7 in April and came in below analysts’ estimates of 49.5, which should cap the US Dollar.

Russia and Ukraine held a second round of negotiations on Monday to find a way to end the three-year war amid escalating conflict. In fact, Ukraine launched a surprise attack on Russian airbases, while Russia deployed a record-breaking 472 one-way attack drones as well as several ballistic and cruise missiles against Ukraine just before the peace talks.

Russia, meanwhile, rejected an unconditional ceasefire and said that it would only agree to end the war if Ukraine gave up big new chunks of territory and accepted limits on the size of its army. This keeps geopolitical risks in play, which, in turn, should further contribute to limiting any meaningful depreciation move for the safe-haven JPY.

Traders now look forward to the release of the US JOLTS Job Openings data, which, along with speeches by influential FOMC members, will drive the USD demand and provide some impetus to the USD/JPY pair. The focus, however, will remain glued to the US monthly employment details, popularly known as the Nonfarm Payrolls (NFP) report on Friday.

USD/JPY might struggle to capitalize on the intraday bounce beyond the 100-hour SMA

From a technical perspective, the overnight breakdown below the 143.65-143.60 horizontal support, which coincided with the 100-hour Simple Moving Average (SMA), was seen as a key trigger for the USD/JPY bears. The said area should now keep a lid on any further intraday move-up. A sustained strength beyond, however, might trigger a short-covering rally and lift spot prices to the 144.00 mark. The momentum could extend further, though it runs the risk of fizzling out near the 144.40-144.45 supply zone.

On the flip side, weakness back below the 143.00 mark could find some support near the Asian session low, around the 142.40-142.35 region. This is followed by the 142.10 area, or last week's swing low, below which the USD/JPY pair could resume its recent downfall from the May monthly swing high. Spot prices might then weaken to the next relevant support near the 141.60 area before eventually dropping to sub-141.00 levels.