USD/JPY weakens as the safe-haven Yen benefits from a softer US Dollar
- USD/JPY erases the prior session's gains with prices trading below 143.00.
- US economic data reveals a potential slowdown in the US labor market.
- The Japanese Yen remains resilient despite increased steel and aluminum tariffs, benefiting from its status as a safe-haven currency.
The Japanese Yen (JPY) is gaining ground against the US Dollar (USD) on Wednesday, following a series of economic data releases and rising trade tensions, which have contributed to Yen appreciation.
At the time of writing, USD/JPY has fallen below 143.00, now serving as psychological resistance with prices shifting closer toward 142.60.
US labour market weakness may provide a fresh opportunity for Yen traders
Wednesday’s ADP Employment Change data indicated a softening in the US private sector's employment situation. The report shows an increase of only 37,000 jobs in May, falling short of the forecast of 115,000 jobs.
Additionally, the Institute for Supply Management (ISM) released its Purchasing Managers Index (PMI) for May, reporting a figure of 49.9 for the ISM Services PMI that was far lower than the 52.0 expected print. This indicates that business conditions and optimism in the US services sector have fallen into contraction territory.
The combination of declining confidence in the largest sector of the US and labour market softening could add pressure on the Fed to cut interest rates prior to the September meeting.
According to the CME FedWatch Tool, analysts are pricing in a 58.5% probability of a rate cut in September, with the Fed expected to leave interest rates unchanged within the 4.25% to 4.50% range at the June and July meetings.
For Japan, the Bank of Japan (BoJ) has reaffirmed its commitment to increase interest rates in response to rising inflation.
With the 50% tariffs on aluminum and steel imports to the US taking effect on Wednesday, Japan remains vulnerable to rising costs that could threaten its export-driven industries. With tariffs filtering through to the inflation data, Bank of Japan (BoJ) Governor Kazuo Ueda has warned corporations and households of the potential negative implications of the costs associated with the Trump administration’s tariff policies.
On Tuesday, Ueda addressed markets: "Recent tariff policies will exert downward pressure on Japan's economy through several different channels". However, he also stated that the central bank is “expected to continue hiking rates if underlying inflation accelerates to 2% as projected.”
With the USD/JPY highly sensitive to the interest rate differentials between the United States (US) and Japan, interest rate expectations remain a prominent driver of price action. However, with the BoJ in a position to hike rates and the Fed expected to cut, the narrowing divergence between the respective central banks could provide near-term support for the Yen, particularly if the US labour market shows signs of weakening.
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.
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