The Japanese yen continued its downward trajectory on Tuesday, , pressured by a combination of weakening economic data and shifting expectations regarding the Bank of Japan’s (BoJ) monetary policy. The USD/JPY exchange rate rose, building on gains from the previous day, as investors reassessed the likelihood of an imminent interest rate hike by the BoJ.
The catalyst for the yen’s decline was a slowdown in Japan’s consumer price inflation (CPI). While core-core inflation – a measure excluding volatile food and energy prices – remained at in , the overall CPI figure slowed to , dampening speculation that the BoJ would move to tighten monetary policy as early as . Prior to the weekend, the probability of an hike was estimated at around ; that figure has now fallen to just under , the lowest level since mid-.
Adding to the yen’s woes, reports surfaced indicating that Prime Minister Sanae Takaichi expressed resistance to tighter monetary policy during a recent meeting with BoJ Governor Kazuo Ueda. This perceived reluctance from the government to support a rate hike further cooled expectations of near-term policy adjustments. The market is now attempting to reconcile last week’s Supreme Court decision and President Trump’s new tariff policies with the potential for monetary policy shifts.
The US dollar, meanwhile, experienced modest gains against most of the G10 currencies, though its movement remained largely contained within recent ranges. The USD/JPY pair benefited from this relative strength, pushing higher even as broader market activity was subdued by a winter storm impacting New York trading. The euro, for example, failed to sustain gains above its five-day moving average, trading quietly around .
Beyond domestic economic factors, geopolitical tensions are also contributing to the yen’s weakness. Beijing’s recent announcement of sanctions against additional Japanese companies with military ties, and the placement of others on a watch list, is expected to have a chilling effect on economic relations between the two countries. Compounding this, a decline in Chinese tourist arrivals in Japan is further weighing on the Japanese economy.
Analysts at FXStreet note that concerns about Japan’s fiscal health, coupled with the delayed expectations for a BoJ rate hike, are undermining the yen. The potential for further stimulus measures from Prime Minister Takaichi adds to this pressure. However, they also caution that intervention fears and a cautious market approach may limit the downside potential for the yen.
The possibility of joint intervention by Japanese and US authorities to stabilize the yen remains a key factor. Reports suggest that US Treasury Secretary Scott Bessent conducted a “rate check” in as the yen approached against the dollar, signaling a willingness to act to prevent excessive currency depreciation. This intervention risk is expected to cap further gains in the USD/JPY pair.
Looking ahead, market participants are awaiting key US economic data releases, including the Conference Board’s Consumer Confidence Index and the Richmond Manufacturing Index. Speeches from Federal Open Market Committee (FOMC) members are also on the agenda, though consensus suggests the Federal Reserve is likely to remain on hold through at least mid-. President Trump’s State of the Union address later today could also influence market sentiment.
Despite the dovish outlook for the Fed, the growing acceptance that the BoJ will continue its path toward policy normalization creates a divergence in monetary policy expectations. This divergence, combined with the potential for intervention, suggests that the USD/JPY pair may face headwinds despite the current downward pressure on the yen. However, the immediate outlook remains tilted towards further yen weakness, particularly given the combination of economic data, political factors, and shifting market expectations.
Investing.com highlights that the USD/JPY pair is currently trading near , a significant increase from this week’s low of . The firm suggests monitoring both the USD/JPY pair and the FTSE 100 for potential trading opportunities.
