USD/JPY witnessed a dramatic turnaround. Japanese yen Surges staging a 200-pip rebound from its recent lows against the US Dollar (USD). This sharp move driven by a confluence of fundamental catalysts, including shifting expectations around monetary policy from the Bank of Japan (BoJ) and the US Federal Reserve (Fed), easing trade tensions between the US and Japan, and rising geopolitical uncertainties. The USD/JPY pair slid below the mid-145.00s during Tuesday’s Asian trading hours, signaling renewed control by Yen bulls.
BoJ Policy Shift Lends Credibility to Yen Rebound
Last week, the BoJ surprised markets by signaling a more hawkish stance than previously expected. While it announced a slowdown in the pace of bond purchase reductions from fiscal 2026, the recent core inflation data showing a rise to its highest level in over two years reinforced expectations that rate hikes could be on the table sooner rather than later.
Japan’s core inflation has remained above the BoJ’s 2% target for more than three consecutive years, suggesting underlying inflationary pressures are firming. This economic backdrop gives the central bank more confidence in further policy normalization, making the JPY more attractive, especially in contrast to a potentially dovish Fed.
Japan’s PMI Data Bolsters BoJ Hawkish Case
Adding fuel to the BoJ’s hawkish tilt, Japan’s Manufacturing and Services PMIs released on Monday beat expectations. The better-than-forecast data indicates that the Japanese economy is gaining traction, easing concerns about potential negative fallout from the monetary tightening path.
Stronger PMIs suggest robust demand conditions and support the narrative that the BoJ may continue to hike rates without derailing growth—a rare alignment that amplifies investor interest in the Japanese Yen.
Fed Officials Hint at Imminent Rate Cuts: Dollar Slips
On the other side of the Pacific, the US Federal Reserve is signaling a potential policy shift in the opposite direction. Fed Governor Michelle Bowman on Monday hinted that rate cuts could begin as early as July, citing rising risks to the labor market and diminishing inflationary threats from tariffs.
Bowman’s dovish stance was echoed by Chicago Fed President Austan Goolsbee, who noted that the economic impact of the US tariff surge has so far been moderate. His statement, combined with comments from Fed Governor Christopher Waller last Friday suggesting a possible rate cut at the upcoming July 29–30 FOMC meeting, have collectively fueled speculation that the Fed could deliver at least two, possibly three, 25-bps rate cuts this year.
Markets are now pricing in 58 basis points worth of rate cuts, reinforcing the narrative of a clear policy divergence between the Fed and BoJ.
US PMIs Reflect Mixed Economic Momentum
The latest batch of S&P Global PMI data further supports the Fed’s dovish pivot. While the Manufacturing PMI held steady at 52.0 in June, the Services PMI dipped slightly to 53.1 from 53.7. The Composite PMI, a broader measure of economic activity, slipped to 52.8 from 53.0—pointing to a modest slowdown in overall growth momentum.
This softening in economic indicators weakens the case for prolonged policy tightening by the Fed and exerts additional pressure on the US Dollar across the board.
US-Japan Trade Hopes Fuel Further JPY Strength
Beyond the central bank narratives, diplomatic developments are playing a significant role in boosting JPY demand. Reports indicate that Japan’s Economy Minister Ryosei Akazawa is planning his seventh visit to Washington as early as June 26. This raises hopes for a breakthrough trade agreement before the July 9 deadline, when steep US reciprocal tariffs are set to take effect.
Markets are interpreting this diplomatic engagement as a sign that both nations are seeking to avert an escalation in trade tensions. Such optimism lends further support to the Yen, not only from a fundamental standpoint but also due to reduced risk premium expectations.
Geopolitical Risks Keep Safe-Haven Yen in Demand
In parallel, geopolitical developments in the Middle East are keeping risk sentiment cautious. US President Donald Trump claimed on Truth Social that Israel and Iran had agreed to a “complete and total ceasefire.” However, with no official confirmation from Israel and only a conditional response from Iran’s foreign minister, market participants remain skeptical.
The lingering uncertainty surrounding the ceasefire deal adds to the broader risk-off mood, underpinning demand for traditional safe-haven assets like the Japanese Yen. Coupled with trade policy ambiguity, this risk-averse backdrop limits any meaningful upside in USD/JPY.
Fed Speakers and US Data to Drive Near-Term Japanese yen Action
Looking ahead, traders will turn their attention to upcoming remarks from Fed Chair Jerome Powell, who scheduled to testify before Congress this week. His speech, alongside comments from other key FOMC members, will be dissected for insights into the timing and scale of future rate cuts.
Additionally, Tuesday’s release of the US Conference Board’s Consumer Confidence Index and the Richmond Manufacturing Index will be closely watched. Any further signs of economic softening could reinforce the dovish Fed outlook and accelerate USDJPY downside momentum.
Technical Analysis: USDJPY Outlook Signals Further Downside Potential
From a technical perspective, the Japanese yen drop below the 145.50 psychological support level is significant. The next key support lies near the 144.80 region, followed by the 144.00 zone. A sustained move below these levels could open the door to a deeper correction toward the 143.20–143.50 range.
On the upside, the 146.30–146.50 region now acts as immediate resistance. A break above this could temporarily stabilize the pair, but the broader outlook remains bearish unless there is a material shift in Fed or BoJ policy outlooks.
Conclusion: Japanese Yen Bulls Take Charge as Policy Divergence Widens
The sharp rebound in the Japanese Yen reflects a significant realignment in monetary policy expectations between Japan and the US. With the BoJ signaling a hawkish path amid solid inflation and PMI data, and the Fed shifting toward rate cuts, the USDJPY pair faces increasing downside pressure.
Safe-haven demand and improving trade prospects for Japan add further fuel to the rally in the Yen. The upcoming testimony from Fed Chair Powell and fresh US macro releases will be crucial in shaping the pair’s near-term trajectory.
Yes, recent inflation data and strong PMI numbers suggest the BoJ may continue tightening. Market participants now expect additional rate hikes as early as Q3 2025.
The main drivers include: Diverging central bank policies (BoJ potentially hiking, Fed likely cutting), Weakening US PMIs, Dovish Fed commentary, Trade deal optimism between Japan and the US, Geopolitical uncertainty in the Middle East
The Yen is rising due to a combination of hawkish BoJ expectations, softer US economic data, and rising odds of Fed rate cuts. Geopolitical risks and trade optimism are also supporting the Yen.
