The Japanese Yen (JPY) continues to underperform across global foreign exchange markets, notably weakening for the second consecutive session against the US Dollar (USD). 

The currency slid to its lowest level in over two weeks during early Asian trading on Tuesday, driven by a convergence of deteriorating trade sentiment, weaker Japanese macroeconomic data, and diminishing expectations for a near-term rate hike by the Bank of Japan (BoJ). The professionals at Aurudium break down this topic step by step in the following article.

Trade War Escalation Fuels Yen Depreciation

At the forefront of the JPY’s decline is an escalation in global trade tensions, triggered by the US President’s announcement of a 25% tariff on Japanese goods, effective August 1, 2025. This abrupt policy shift adds significant strain on Japan’s already fragile external sector, unsettling investors and dampening the outlook for domestic growth.

Although Japanese Prime Minister Shigeru Ishiba noted that negotiations with the US would continue until the new tariff deadline, markets are pricing in heightened trade risks. The mere threat of punitive tariffs introduces substantial uncertainty, especially for Japan’s export-driven economy. These developments significantly diminish the likelihood of a BoJ policy tightening in the near term, weakening support for the yen.

BoJ Rate Hike Bets Fizzle on Soft Wage Data

Adding to the yen’s woes, official data released Monday showed that nominal wage growth in Japan slowed for the third consecutive month, while real wages, adjusted for inflation, posted their sharpest decline in 20 months. The downturn in wages suggests persistently weak domestic consumption and undermines the BoJ’s ability to meet its 2% inflation target sustainably.

In light of this, expectations for a BoJ rate hike, already tepid, have receded further. The central bank is widely expected to adopt a cautious stance until it sees meaningful improvement in underlying economic fundamentals. JPY bears, therefore, appear emboldened by these developments, particularly as external headwinds amplify concerns around Japan’s economic resilience.

USD/JPY Strengthens Despite Risk-Off Sentiment

Interestingly, the yen’s traditional role as a safe-haven asset has been muted despite a broad risk-off impulse in global markets. Heightened geopolitical risks, including renewed tensions in the Middle East, and widespread weakness across global equity indices have not produced the usual flight-to-safety that benefits the yen.

Instead, the USD/JPY pair has climbed, bolstered by a stronger US Dollar, which continues to draw support from robust domestic fundamentals. Last Friday’s Nonfarm Payrolls report surprised to the upside, reinforcing market conviction that the Federal Reserve (Fed) may hold interest rates steady in the face of rising inflationary pressures, pressures that could be exacerbated by the US President’s latest tariffs.

Investors are now keenly awaiting the Federal Open Market Committee (FOMC) minutes due Wednesday for clarity on the Fed’s future rate trajectory. Against this backdrop, USD demand remains firm, further weighing on the yen and helping the USD/JPY pair consolidate its recent gains.

Technical Outlook: USD/JPY Builds Momentum Above Key Moving Average

From a technical standpoint, the USD/JPY pair appears well-supported after breaking above the critical 100-day Simple Moving Average (SMA), currently acting as a dynamic level of support. With daily oscillators exhibiting positive momentum, the path of least resistance seems to favor further upside.

• The pair has already tested the 146.45 resistance level during the Asian session and appears poised to challenge the 147.00 psychological threshold.
• A sustained move above this level could trigger additional bullish momentum, targeting the 147.60 zone, followed by the June swing high around 148.00.

On the downside:

• Immediate support lies near the 145.65–145.60 horizontal band.
• A deeper retracement might attract dip buyers around the 145.00 psychological level, which now functions as a pivotal floor.
• A break below this could expose the pair to further weakness toward the 144.35–144.30 support zone, en route to the key 144.00 handle.

Yen Outlook Remains Clouded by Policy and Geopolitical Risks

In summary, the Japanese Yen’s trajectory appears skewed toward further depreciation amid a combination of trade-related headwinds, tepid domestic data, and waning BoJ tightening prospects. 

While broader risk aversion would typically support the yen, its reaction remains muted due to the US Dollar’s dominance and growing investor skepticism over the BoJ’s ability to exit ultra-loose monetary policy any time soon.

The market’s attention now shifts to the FOMC minutes and further developments in the US-Japan trade dialogue, both of which could influence the next directional bias for the USD/JPY pair. For now, the fundamental and technical landscape favors a bullish USD/JPY outlook, even as uncertainty continues to loom over the yen’s longer-term recovery prospects.