Japanese Yen struggles to find direction as conflicting trade and monetary signals weigh on sentiment.

The Japanese Yen (JPY) starts the new trading week in a subdued mood, oscillating within a tight range against its American counterpart. After dropping to a two-week low against the US Dollar (USD) last Friday, the Yen struggles to attract aggressive buying interest despite simmering geopolitical tensions and mixed trade developments. As of the Asian session, USDJPY remains comfortably above the mid-143.00s, reflecting an uneasy equilibrium between fundamental tailwinds and headwinds for the Japanese currency.

The broader market sentiment being shape by several complex factors. On one hand, fading optimism surrounding a potential US-China trade agreement is reviving demand for traditional safe-haven assets like the Yen. On the other hand, diminishing expectations for further near-term rate hikes from the Bank of Japan (BoJ) are keeping JPY bulls hesitant, balancing the risk appetite. Meanwhile, a modest recovery in the US Dollar, driven by repositioning ahead of critical economic data, is helping the USDJPY pair to maintain its foothold.

Trade Uncertainty Offers Support to the Safe-Haven Yen

Lingering concerns about US-China relations continue to dominate headlines and influence risk sentiment. US Treasury Secretary Scott Bessent, speaking over the weekend, revealed he was unaware of any recent direct communication between President Trump and Chinese President Xi Jinping. Bessent’s statement downplayed any notion of imminent breakthroughs, a sentiment reinforced by Beijing’s repeated denials of ongoing formal trade discussions.

The absence of tangible progress in US-China trade talks tempers optimism that had briefly fueled risk-on sentiment earlier this month. For the Japanese Yen, this backdrop usually translates into safe-haven inflows. The Yen’s historic sensitivity to geopolitical risks stems from Japan’s large current account surplus and the repatriation of overseas assets during periods of global uncertainty.

Additionally, Japan’s prospects for striking a favorable bilateral trade agreement with the US offer a mild tailwind for the Yen. Over the weekend, Bessent described his talks with Japanese officials as “very constructive,” further fueling optimism that a deal could eventually materialize. This potential agreement, while still in its infancy, could help insulate Japan’s economy from the broader risks associated with the intensifying US-China rivalry.

BoJ’s Cautious Stance Limits Immediate Yen Upside

Despite the supportive trade-related headlines, fundamental challenges persist for the Japanese Yen. Foremost among them is the Bank of Japan’s measured approach to tightening monetary policy. While inflation has remained above the BoJ’s 2% target for three consecutive years, policymakers remain wary of external shocks—particularly from rising US tariffs—that could derail Japan’s fragile recovery.

Analysts anticipate that the BoJ will leave interest rates unchanged during its upcoming policy meeting later this week. There are growing fears that the new wave of US tariffs could shave off as much as 0.5% from Japan’s GDP growth. Against this backdrop, the central bank is expected to adopt a wait-and-see approach, potentially pushing back further rate hikes into 2025.

However, Japan’s inflation dynamics and wage growth trends still point to a medium-term tightening bias. Large corporations have offered significant pay hikes this year, a development that boosts domestic consumption and strengthens the case for policy normalization down the line. If inflation remains sticky and economic resilience persists, the BoJ may resume hiking rates in 2025, providing a medium- to long-term bullish backdrop for the JPY.

For now, though, the lack of imminent tightening keeps the JPY from launching a sustained rally, even as external factors turn supportive.

Fed Policy Expectations Counterbalance USD Gains

While the BoJ’s cautious stance acts as a headwind for the Yen, expectations surrounding US monetary policy are increasingly weighing on the US Dollar. Market participants have largely priced in the start of the Federal Reserve’s rate-cutting cycle by mid-2025, with some estimates suggesting a cumulative 100 basis points of easing by year-end.

This dovish Fed outlook contrasts sharply with earlier expectations that rate cuts would be postponed until late 2025 or even 2026. A combination of moderating inflation, cooling labor markets, and rising concerns about economic stagnation has tilted the policy bias toward easing. The upcoming batch of US economic data, including the closely-watched Personal Consumption Expenditures (PCE) inflation report, could further cement this narrative.

Given the narrowing interest rate differential between the US and Japan, the USD/JPY pair faces structural headwinds over the medium term. Nevertheless, the current modest strength in the USD, likely driven by technical repositioning and month-end flows, is providing near-term support and preventing the pair from breaking lower.

Geopolitical Tensions Add Complexity to the Outlook

Adding another layer of uncertainty is the evolving geopolitical landscape. Over the weekend, North Korea confirmed it had deployed troops to support Russia in its ongoing conflict with Ukraine. Meanwhile, US Secretary of State Marco Rubio warned that Washington might abandon its diplomatic efforts if meaningful progress is not achieved soon.

The escalation of geopolitical tensions usually favors safe-haven currencies like the Japanese Yen. However, the market’s reaction thus far has been muted, possibly due to uncertainty about how deeply global economic flows will be impacted. Nonetheless, traders should remain cautious, as a sudden flare-up in hostilities could trigger sharp JPY appreciation, especially if global risk appetite deteriorates rapidly.

Technical Outlook: Japanese yen Holding Steady, But Vulnerable

From a technical perspective, USD/JPY continues to trade in a consolidative pattern, with strong support near the 143.20-143.30 region and resistance around 144.50-144.70. The Relative Strength Index (RSI) on the daily chart remains neutral, suggesting a lack of strong momentum in either direction.

A decisive break below 143.20 could expose the pair to deeper losses toward the psychological 142.00 handle. Conversely, a sustained move above 144.70 would open the door for a retest of the 145.00 barrier, though such a move would likely require a significant catalyst—either from BoJ surprises or US data disappointments.

For now, the bias remains cautiously bearish for USD/JPY, given the broader macroeconomic forces favoring the Yen, even if near-term price action remains range-bound.

Conclusion: Japanese yen Tug-of-War Between Trade Risks and Monetary Caution

The Japanese Yen enters the week facing a tug-of-war between supportive trade-related safe-haven flows and the drag of a cautious BoJ. While fading hopes of a US-China trade deal and escalating geopolitical tensions lend strength to the JPY, the central bank’s reluctance to tighten policy aggressively caps the upside.

At the same time, the weakening US Dollar narrative, fueled by dovish Fed expectations, adds a layer of complexity to the USD/JPY outlook. As traders brace for a busy calendar filled with economic releases and central bank decisions, volatility could spike, offering fresh directional cues for the currency pair.

Until then, the USDJPY is likely to remain in consolidation mode, with risks skewed slightly in favor of the Yen appreciating over the medium term.