In addition to the divergence in monetary policy between the Fed and the Bank of Japan, the yen has replaced the US dollar as the main safe-haven currency, supporting USDJPY bears. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Reduced volatility favors the Japanese yen.
- The Bank of Japan has signaled the continuation of the normalization cycle.
- Tokyo will protect its companies and consumers from the US tariffs.
- Short trades on the USDJPY pair formed at 150.7 can be kept open.
Weekly Fundamental Forecast for Yen
The Japanese yen has demonstrated robust performance as a safe haven asset, in contrast to the US dollar, which has been marked by instability. Investors are puzzled as to how one can favor the US dollar while Donald Trump is scaring everyone with tariffs and creating chaos in the financial markets. Against this backdrop, the USDJPY rate is declining, and bears are trying to establish a robust downtrend.
The decline in volatility of the yen and Swiss franc may disappoint their fans. In such an environment, carry trade activity increases, and the status of the funding currency would deal a blow to USDJPY bears. However, this scenario hinges on a broadening of global risk appetite, which is currently not the case. The US protectionist policies are exacerbating the deterioration of the indicator.
Japanese Yen and Swiss Franc Volatility
Source: Bloomberg.
The decline in USDJPY quotes was anticipated. This is particularly notable in light of Goldman Sachs’s prediction of three monetary expansion acts by the Fed in 2025, in contrast to the two cuts anticipated by the market. Meanwhile, the Bank of Japan has signaled a continuation of the monetary tightening cycle.
The minutes of the March BoJ meeting suggested a possible pause in the normalization cycle. The BoJ acknowledged that the US tariffs could hurt the Japanese economy. As a result, the central bank must exercise particular caution.
However, a thorough examination of the minutes reveals some positive developments. The Bank of Japan has expressed concerns over the negative impact of high prices on households and has indicated that higher wages will stimulate consumer spending. Indeed, consumer prices in Tokyo accelerated to 2.4% in March, surpassing all Bloomberg expert forecasts. Core inflation also rose to 2.9% from 2.8%.
Japan Inflation Change
Source: Bloomberg.
Concerns regarding the yen’s future have been fueled by the 25% tariffs imposed by the US on automobile imports. These exports account for a one-third share of Japan’s exports to the US. The industry employs 5.58 million people or 8.3% of the total labor force. In response, Prime Minister Shigeru Ishiba has pledged to take all necessary measures to support companies and their workforce. He has not ruled out the possibility of retaliation, which could potentially escalate into a trade war.
Consequently, even if both the Fed and the Bank of Japan maintain their current monetary policy cycles, USDJPY bears will benefit from the shift from the US dollar to the yen as a safe-haven asset.
Weekly USDJPY Trading Plan
The strategy of opening short positions on the USDJPY pair in the event of the pair’s failure to settle above the resistance level of 150.7 has proven effective. The downtrend is showing signs of recovery, and in such conditions, one can keep their short trades open and initiate more short positions from time to time.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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