Japanese yen Buckles Under Tariff Relief and Bond Woes

Japanese yen Soars Court Blocks Trump’s Tariffs, Markets Cheer

The Japanese Yen (JPY) took a beating in early Thursday trade as global risk appetite surged after a U.S. federal court blocked former President Donald Trump’s sweeping “Liberation Day” tariffs. The Court of International Trade ruled that Trump had exceeded his executive authority by attempting to impose reciprocal tariffs on imports from nearly every country. The market interpreted this as a positive development for global trade, prompting investors to unwind their safe-haven positions.

As a classic haven asset, the Yen often thrives during periods of global uncertainty and economic stress. But with the court’s decision quelling immediate trade fears, risk-on sentiment flooded markets. Equity indices in Asia posted broad gains, while U.S. equity futures pointed higher, reflecting optimism over a reduction in protectionist headwinds. In contrast, the JPY weakened sharply across the board, most notably against the U.S. Dollar.

Risk-On Mood Fuels Japanese yen Four-Day Rally

The USDJPY pair climbed for the fourth consecutive day, extending its weekly uptrend amid heightened appetite for risk assets. Investors rotated out of defensive currencies like the Yen and into higher-yielding or more growth-sensitive alternatives. The pair tested its highest levels in nearly two weeks, driven by both external macroeconomic dynamics and central bank divergence.

Wednesday’s hawkish Federal Open Market Committee (FOMC) Minutes reinforced the view that the Federal Reserve is in no hurry to ease monetary policy. This added another layer of support to the USD, amplifying its upward momentum against the JPY.

Fed Minutes Show Patience Despite Cut Expectations

The Minutes from the Fed’s May 6–7 policy meeting painted a cautious picture, emphasizing the need for more data before committing to rate cuts. Policymakers acknowledged the downside risks from trade uncertainty and slower global growth, but still opted to maintain the current policy stance. This “wait-and-see” tone was perceived as mildly hawkish, especially as inflationary pressures have proven more persistent than many anticipated.

Despite the hawkish tone in the Minutes, interest rate futures markets – as tracked by the CME FedWatch Tool – still reflect a strong likelihood of two 25-basis point rate cuts before year-end. This expectation is in stark contrast with what is unfolding in Japan.

BoJ Stays Hawkish, But JGB Auction Reveals Market Nervousness

While the Federal Reserve appears to be on the path to easing policy later in 2025, the Bank of Japan (BoJ) is leaning in the opposite direction. With inflation in Japan showing signs of becoming entrenched, speculation is mounting that the BoJ could hike rates again later this year. This marks a significant shift from years of ultra-loose monetary policy and zero interest rates.

However, concerns about Japan’s fiscal sustainability came into focus during Wednesday’s disappointing 40-year Japanese Government Bond (JGB) auction. Demand was the lowest since July, reflecting growing investor anxiety over the country’s ballooning debt burden. Yields at the long end of the curve fell sharply, reinforcing the idea that investor confidence in Japan’s fiscal outlook is weakening. The poor auction result triggered additional outflows from Japanese assets and accelerated the sell-off in the Yen.

Structural Divergence Keeps USDJPY Supported

The market is currently navigating a complex tug-of-war between BoJ-Fed policy divergence and traditional risk sentiment flows. On one hand, the BoJ’s hawkish signals should theoretically offer support to the JPY. On the other hand, as long as global risk appetite remains buoyant and the Fed refrains from dovish pivots, the USD/JPY pair remains biased to the upside.

However, analysts warn that the upside potential for Japanese yen could be limited by structural factors. The possibility of BoJ rate hikes, if realized, could eventually draw support back into the Yen, especially if U.S. rate cut expectations firm up further. For now, the momentum is clearly with USD bulls, but traders are cautious about becoming overly bearish on the JPY.

All Eyes on Tokyo CPI and U.S. Data Releases

Friday’s Tokyo Consumer Price Index (CPI) will be a key event risk for Yen traders. The inflation print will offer a high-frequency look into price trends in the Japanese capital and will likely influence expectations for the next BoJ rate move. A hotter-than-expected CPI could revive interest in the Yen and dampen USDJPY’s recent rally.

Meanwhile, U.S. data due later Thursday – including Preliminary Q1 GDP, Weekly Jobless Claims, and Pending Home Sales – could further sway dollar sentiment. Additionally, upcoming Fed speeches may offer fresh clues about policymakers’ inflation and rate expectations heading into the second half of the year.

Technical Outlook: Japanese yen Bulls in Control, But Resistance Looms

From a technical perspective, Japanese yen remains in a firm uptrend, but momentum indicators suggest some signs of exhaustion near key resistance levels. The 157.00 psychological handle looms as a potential barrier, and a break above could open the door for a retest of 158.00.

On the downside, support is seen near the 20-day moving average (currently around 155.50), followed by the 50-day moving average near 154.80. A breach below these levels could trigger a deeper pullback, particularly if risk sentiment sours or U.S. data disappoints.

Market Reactions Snapshot

• USD/JPY: Surged to nearly two-week highs; up for the fourth consecutive day.
• Nikkei 225: Gained over 1.3% as risk appetite surged across Asia.
• JGB Yields: Long-dated yields slumped after a weak 40-year bond auction.
• Wall Street Futures: Pointed higher, signaling positive sentiment in global equities.
• Gold and Yen: Both traditional safe-haven assets underperformed amid the risk-on rally.

Key Drivers Behind USD/JPY’s Rally