The Japanese Yen (JPY) continued its downward drift on Tuesday, weakening for the second straight day against the US Dollar (USD) despite a broadly risk-averse market environment and a softer greenback. The USDJPY pair climbed to its highest level in over two weeks during the Asian session, defying conventional market logic that typically sees the Yen strengthen during periods of heightened risk aversion.
This anomaly is largely explained by two key developments: escalating trade tensions between the US and Japan and persistently weak domestic wage data that threatens to derail the Bank of Japan’s (BoJ) efforts to normalize interest rates.
Trump Slaps Tariffs on Japan—Deadline Set for August 1
US President Donald Trump ramped up the trade rhetoric on Monday, announcing a 25% tariff on a broad range of Japanese imports, effective August 1. This move came alongside a batch of similar measures against other trading partners, including the EU and Mexico, in what many analysts are calling the most aggressive phase of the trade war since 2018.
While Trump left the door open for negotiations by setting the tariff deadline a few weeks out, the announcement has rattled markets and undermined confidence in Japanese export-driven sectors. Traders fear a chilling effect on Japan’s economy, which is already grappling with sluggish consumer demand and stagnating wages.
Japan’s Wage Growth Crumbles BoJ Rate Hike Odds Fade
Adding to the pressure on the Yen was Monday’s release of disappointing wage growth data from Japan’s labor ministry. Growth in nominal wages decelerated for the third straight month in May 2025, while inflation-adjusted real wages dropped at the fastest pace in 20 months.
These wage dynamics significantly diminish the likelihood of a near-term rate hike by the BoJ, which had earlier signaled a slow and cautious move away from its ultra-loose monetary policy. With real incomes falling, domestic consumption remains fragile, making it difficult for the BoJ to justify tighter policy.
BoJ Governor Kazuo Ueda has repeatedly emphasized that wage growth is a prerequisite for sustainable inflation and any durable exit from negative interest rates. This week’s data undermines that narrative, prompting markets to scale back their bets on another BoJ rate hike this year.
Current Account Surprise Fails to Buoy the Japanese Yen
Interestingly, the Yen failed to gain support from a positive surprise in Japan’s current account surplus, which rose more than expected in May. The surplus widened to ¥3.44 trillion, up from ¥2.95 trillion a year earlier, driven largely by gains in investment income.
However, investors remained unimpressed. The increase in current account surplus was seen as a backward-looking data point, offering little comfort amid forward-looking risks stemming from wage stagnation, trade tariffs, and geopolitical shocks.
Middle East Tensions Stoke Global Risk Aversion
Elsewhere, rising geopolitical tensions in the Middle East have triggered a global risk-off wave, sending equity markets into the red across Asia and Europe. In normal circumstances, such an environment would have bolstered demand for the safe-haven Yen, as investors typically flock to JPY during times of uncertainty.
Yet, the Yen’s muted response this time around reflects a broader lack of investor confidence in Japan’s macroeconomic resilience. With wage data weakening and trade tensions looming, the traditional safe-haven status of the Yen is being called into question at least in the near term.
BoJ Dilemma Deepens Amid External and Internal Pressures
The Bank of Japan now finds itself in a delicate position. On one hand, the central bank has been under growing pressure to gradually normalize policy, especially in light of persistent inflation above 2%. On the other hand, weak wage data and deteriorating global trade conditions risk undercutting the fragile recovery.
The BoJ’s cautious stance contrasts with global peers like the Fed and ECB, which have paused or even hinted at rate cuts. This policy divergence had initially supported the Yen, but with domestic conditions deteriorating, the pressure to maintain dovish guidance could now weaken the Japanese yen further.
USD Outlook: Tariffs May Fuel US Inflation, Bolster the Fed’s Hawkish Hold
From the US side, Friday’s robust Nonfarm Payrolls (NFP) report bolstered expectations that the Fed will maintain its current rate levels for longer. Now, with Trump’s tariffs threatening to raise import prices, markets are beginning to price in additional inflationary pressure in the coming months.
While that may hurt growth prospects, it also makes it more difficult for the Federal Reserve to justify any near-term rate cuts. A higher-for-longer Fed narrative is inherently supportive for the US Dollar, particularly against low-yielding currencies like the Japanese Yen.
Moreover, if tariffs lead to higher core inflation, the Fed may even retain a tightening bias, which could further widen the US-Japan interest rate differential and support further upside in USDJPY.
Technical Outlook: USDJPY Eyes 162.00 Next?
Technically, the USDJPY pair is showing strong bullish momentum, having broken above key resistance levels near 160.50. If the pair holds above this zone, it could set its sights on the next psychological level near 162.00, especially if US data continues to outperform and trade tensions keep weighing on the Yen.
Key support now lies at 159.60, with a break below potentially exposing the pair to a drop toward 158.30, though such a move would require a strong reversal in risk sentiment or surprise commentary from BoJ officials.
Conclusion: Japanese Yen Safe-Haven Role Dented as Macro Weakness Deepens
In sum, the Japanese Yen is weakening under the combined weight of deteriorating domestic fundamentals and global trade shocks. The escalation of US-Japan trade tensions, coupled with dismal wage data and fading BoJ hawkishness, have all contributed to JPY’s underperformance—even in a risk-off environment.
While safe-haven flows could theoretically support the Yen in the short term, the fragility of Japan’s domestic economy is limiting upside potential. Unless wage trends improve or trade tensions ease meaningfully, the Yen is likely to remain on the defensive against the US Dollar in the coming weeks.
All eyes now turn to this week’s FOMC minutes and the upcoming BoJ policy commentary, which could provide more clues about the future trajectory of USDJPY.
Disclaimer: This blog is for informational purposes only and does not constitute financial advice. Always conduct your own research and consult a professional advisor before making investment decisions.
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