Japanese yen Holds Ground as Global Uncertainty and Hawkish BoJ Signals Keep Safe-Haven Demand Alive
The Japanese Yen (JPY) remained in favor through Friday’s Asian session, gaining for the second consecutive day as a wave of supportive domestic and international developments boosted investor interest in the safe-haven currency. While the broader market tone tempered by modest strength in the US Dollar (USD) ahead of key inflation data, the USDJPY pair saw limited upside, with the JPY largely in control of the narrative.
Trump Tariff Ruling Sparks Market Jitters
A major catalyst behind the JPY’s recent momentum was the decision by a US federal appeals court to reinstate former President Donald Trump’s sweeping trade tariffs. The move reversed a previous ruling that had paused tariff implementation, reviving fears of a renewed escalation in global trade tensions.
This development came as a surprise to many market participants who had assumed Trump-era trade policies were largely defanged. The renewed threat of a protectionist turn in US trade policy triggered a flight to safety among investors, pushing demand toward traditional havens like the Japanese Yen, gold, and US Treasuries.
Safe-Haven Demand Lifts Yen Amid Risk-Off Sentiment
Markets have grown increasingly wary of unpredictable shifts in trade policy, especially with the 2024 US presidential election behind and Trump’s return to political prominence stirring concerns about economic nationalism. The tariff ruling stoked fears of tit-for-tat responses from key US trading partners, including China and the European Union.
Against this backdrop, risk assets struggled to hold gains. Equity markets in Asia slipped into the red, and volatility indexes climbed. In contrast, the Yen saw increased inflows, strengthening its safe-haven status in a geopolitical environment once again clouded by uncertainty.
Tokyo CPI Beats Forecasts, Fuels BoJ Hike Speculation
Adding to the Yen’s upward pressure was a fresh round of upbeat Japanese economic data, particularly inflation readings from Tokyo that exceeded expectations. The headline Consumer Price Index (CPI) for Japan’s capital city rose 3.4% year-over-year (YoY) in May, just slightly below the prior month’s 3.5%, but still well above the BoJ’s 2% target.
Of greater significance was the Core CPI – which strips out volatile food prices – rising to a more-than-two-year high of 3.6% YoY, up from 3.4% in April. Market consensus had been calling for a 3.5% increase, highlighting the upside surprise.
Moreover, the so-called “core-core” CPI, excluding both fresh food and energy, accelerated to 3.3% from 3.1%, underscoring the persistence of domestic inflationary pressures. These sticky inflation indicators reinforced the growing consensus that the BoJ will have little choice but to continue tightening monetary policy.
BoJ Under Pressure Despite Industrial Production Decline
While Japan’s industrial production data showed a 0.9% contraction in April – reversing a modest 0.2% gain in March – the result still beat economists’ expectations for a deeper decline. Notably, forward-looking projections from Japanese manufacturers were optimistic. Firms surveyed expected production to surge by 9.0% in May, though some retracement (-3.4%) is seen in June.
Taken together, the industrial and inflation data suggest that while some sectors may be softening, overall economic momentum remains strong enough to justify further tightening. The Bank of Japan now expected to weigh incoming data carefully, but with wage growth picking up and consumption resilient, market participants are positioning for a potential rate hike before the end of Q3 2025.
Retail Sales Surge Points to Strong Domestic Demand
Another supportive data point for the Japanese economy came from April’s retail sales report, which showed a 3.3% YoY increase – above the 3.1% growth recorded in March. This stronger-than-expected result indicates robust domestic demand and bolsters the view that rising wages are finally translating into higher household spending.
Retail activity has become a key focus for the BoJ, as policymakers look for signs that Japan is transitioning from decades of deflationary stagnation to a more balanced, consumer-led growth model. April’s data gives the BoJ some room to maneuver, especially as underlying inflation pressures remain elevated.
Fed Dovishness Limits USD Gains Despite Modest Support
On the other side of the Japanese yen and US Dollar found some modest support from a marginally better-than-expected revision to Q1 GDP. The updated figures showed the US economy contracted at an annualized pace of 0.2% during the January–March quarter, better than the previously estimated 0.3% decline.
However, optimism from this revision was quickly tempered by a surge in Initial Jobless Claims, which rose to 240,000 for the week ending May 24, a jump from the prior week’s 226,000. This uptick raised concerns about labor market softness, reinforcing expectations that the Federal Reserve may begin cutting rates later this year.
As a result, the US Dollar’s upside was capped, especially against a strengthening Japanese Yen. Fed officials have maintained a dovish tone, repeatedly emphasizing data dependence and caution amid mixed economic signals. The focus now squarely shifts to the release of the US Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation measure.
Japanese yen Looks to PCE Data for Directional Clarity
Markets are treating Friday’s PCE release as a potential inflection point for Japanese yen. A stronger-than-expected inflation reading could push back against the Fed’s dovish narrative and revive the USD’s upside momentum. On the other hand, a softer print could cement expectations for a September rate cut and weigh on the Dollar.
Until then, USDJPY is likely to remain range-bound, caught between the conflicting influences of modest USD support and firm JPY demand. The pair’s recent behavior suggests a reluctance to sustain upside moves beyond the 157.00 handle, especially in the face of resilient Japanese macroeconomic indicators and mounting trade-related uncertainty.
Conclusion: Japanese yen Strength Anchored by Fundamentals and Risk Aversion
The Japanese Yen’s recent appreciation has been underpinned by a solid combination of macroeconomic resilience, elevated inflation, rising retail activity, and a fresh bout of global risk aversion triggered by renewed US trade protectionism. While the US Dollar has shown signs of resilience heading into high-impact inflation data, the broader bias remains skewed in favor of the Yen—especially as BoJ rate hike expectations firm up.
The market will closely monitor upcoming US inflation and employment readings to reassess Fed rate expectations. But for now, barring a major upside surprise in US data, the Yen seems poised to maintain its position on the front foot.
https://voiceoftraders.com/analysis/japanese-yen-buckles-under-tariff-relief-and-bond-woes
