The Japanese Yen (JPY), a traditional safe-haven currency, gave up earlier intraday gains on Friday during the Asian session, retreating sharply from a one-week high against a broadly recovering US Dollar (USD).
Despite this retreat, the bullish bias surrounding the Yen remains intact as geopolitical tensions, trade policy uncertainty, and divergent central bank expectations continue to favor the JPY over the greenback in the medium term. Gradiopexo dives deep into the key elements of this issue, offering expert insights throughout.
Safe-Haven Demand Underpins the Yen
The Yen’s dip follows intensified geopolitical tensions in the Middle East, where Israel launched a pre-emptive strike on Iran, targeting critical nuclear and military sites. Following the strike, Israel’s defense minister declared a state of emergency, heightening fears of retaliatory attacks. Iran’s defense minister warned of possible strikes on US military bases, fueling concerns of a broader regional conflict.
These developments have re-energized flows into safe-haven assets, including gold, US Treasuries, and particularly the JPY, reinforcing the notion that any meaningful downward movement in the Japanese currency could be short-lived.
Historically, during periods of escalating geopolitical risk, the Japanese Yen benefits due to Japan’s large current account surplus and its perceived financial stability.
Trade War Risks Renew Focus on Policy Uncertainty
On another front, global trade tensions are resurging. The US President’s recent announcement regarding unilateral tariff hikes on foreign-made household appliances, including dishwashers, refrigerators, and washing machines, has created uncertainty in global equity and currency markets.
The US President‘s plan to set unilateral tariff rates and inform trading partners within weeks has alarmed investors and driven some away from riskier assets.
BoJ-Fed Divergence Supports JPY Strength
Beyond geopolitical and trade headlines, the fundamental macroeconomic divergence between the Bank of Japan (BoJ) and the Federal Reserve (Fed) plays a pivotal role in the USD/JPY dynamic.
While a Reuters poll earlier this week suggested that the BoJ might pause additional rate hikes, investors seem convinced that policy normalization is underway. Japan has been grappling with inflation consistently above its 2% target for over three years, fueling speculation that the BoJ may tighten monetary conditions further. This perception lends structural support to the Japanese currency.
US macroeconomic data continues to point toward slowing inflation and a softening labor market. The Producer Price Index (PPI) for May rose by just 0.1% month-over-month, following a 0.2% decline in April. Year-on-year, PPI increased by 2.6%, slightly up from April’s 2.5% rise.
Simultaneously, Initial Jobless Claims remained steady at 248,000, but Continuing Claims climbed to nearly two million, the highest since late 2021.
These indicators have reinforced market speculation that the Federal Reserve will pivot to rate cuts, possibly beginning as early as September. The perception of a dovish Fed relative to a cautiously hawkish BoJ fuels a bearish outlook for USD/JPY, making rallies increasingly vulnerable to selling pressure.
USD/JPY Technical Outlook: Recovery Faces Stiff Resistance
Technically, the USD/JPY pair has struggled to maintain traction above the 145.00 psychological level throughout the week. Friday’s retreat from above 143.50 highlights underlying selling interest at higher levels, while technical indicators on hourly and daily charts reflect bearish momentum.
Key downside support is seen around 142.65 and 142.35. A confirmed break below these levels could signal deeper losses toward the 142.00 round number, followed by 141.65 and potentially sub-141.00 levels. Such a move would likely confirm a short-term bearish reversal.
On the upside, a break above 143.55 could meet resistance near 144.00, and further gains may be capped unless the pair clears 144.50 decisively. A close above 145.00 would open the door for a retest of the 145.45 two-week high observed earlier in the week.
Conclusion: Japanese Yen Holds Bullish Edge Despite USD Bounce
In summary, the Japanese Yen’s intraday decline on Friday reflects temporary profit-taking and a short-lived rebound in the USD. However, rising geopolitical risks, trade policy shifts, and the policy divergence between the Fed and BoJ create a fundamentally supportive environment for the Yen.
Unless the US Dollar sees sustained support from stronger-than-expected macroeconomic data or a hawkish surprise from the Fed, USD/JPY rallies are likely to be capped, and the JPY bullish bias remains. As such, traders and investors should continue monitoring risk sentiment, central bank communications, and geopolitical developments as key catalysts in shaping the USD/JPY trajectory in the days ahead.
