The Japanese Yen (JPY) continues to drop at the start of the European session on Monday. This decline is influenced by expectations that the Bank of Japan (BoJ) will delay a rate hike until the first quarter of 2026. Additional worries stem from the potential economic impact of 25% US tariffs on Japanese cars and 24% on other imports, combined with a slight increase in the strength of the US Dollar (USD). Although Japan’s National Consumer Price Index (CPI) remained above the BoJ’s 2% target in May and the PMI numbers were better than expected, the JPY hasn’t rallied. Rising tensions in the Middle East have also not made the JPY more attractive as a safe haven, so the USD/JPY pair is likely to keep rising.

BoJ Adjusts Economic Outlook

The BoJ has changed its plan to reduce bond purchases starting in fiscal 2026 due to an uncertain economy and potential effects from US trade tariffs. Japan’s core inflation for May stays above the 2% target, suggesting the possibility of future rate hikes. However, the JPY remains weak even though PMI data shows growth in manufacturing and services. The Federal Reserve predicts two rate cuts this year, including a 25 basis point cut expected annually in 2026 and 2027, which supports the US Dollar. U.S. military actions targeting nuclear sites in Iran highlight a focus on countering Iran’s nuclear program rather than engaging in war. The USD/JPY pair may rise above the 100-day Simple Moving Average at 146.80, potentially hitting 148.00. On the other hand, if it drops below 146.00, it could attract buyers with support around 145.30-145.25. Falling below 145.00 might lead to technical selling and a bearish outlook. Today’s currency performance shows the Yen is strongest against the New Zealand Dollar. As the Japanese Yen faces downward pressure at the start of the week, much attention is on the latest signals from the Bank of Japan. The idea that rate hikes could be delayed until Q1 2026 is weakening the Yen. Delays in tightening monetary policy—especially when inflation data suggests action may be needed—make carry trades more appealing, especially with currencies backed by stronger interest rate expectations. This pressure directly affects the JPY. Kuroda’s successor seems focused on bond market stability over immediate inflation targeting. While the consumer price index is still above the 2% threshold, officials have clearly indicated caution. This cautious approach lessens the Yen’s appeal, especially in a high-leverage environment. Although PMI figures have exceeded expectations, they haven’t led to broader confidence in Japan’s growth in the currency markets. The new US tariffs are compounding the issue. Imposing 25% tariffs on Japanese vehicles and 24% on other goods raises concerns for Japan’s export sector, a historically strong part of the economy. These tariffs threaten revenue forecasts and could also challenge Japan’s current account surplus, traditionally supportive of the Yen.

Geopolitical Dynamics and Market Movements

The Dollar remains strong as Powell’s team follows its plan. Two rate cuts are expected this year, and while modest cuts are forecast for 2026 and 2027, it suggests that the rate hiking cycle has mostly ended while keeping real yields positive. This situation supports the dollar against the Yen and contributes to the upward trend in the USD/JPY. Increased geopolitical risks often boost safe-haven currencies, but this trend seems to have changed. US military actions in Iran targeting nuclear sites haven’t prompted investors to flock to the Yen as might have been expected. Instead, the Dollar continues to be the go-to for safety, possibly due to higher short-term yields. This change indicates that the JPY is less seen as a safe asset and offers less defensive value amid global instability. From a price action perspective, we’re at a critical technical point. The USD/JPY has surpassed its 100-day moving average and is heading toward the 148.00 level. Resistance may build if US economic data disappoints in the coming sessions. A drop below 146.00 might not start a reversal, but buying interest is likely to emerge between 145.30 and 145.25. Should the price go below 145.00, it may trigger algorithmic selling, leading to thinner liquidity and stronger downward pressure. Today’s currency performance shows the Yen is faring relatively well against the New Zealand Dollar, but it is still soft against most of the G10 currencies. This situation—where some pairs resist the broader trend—suggests localized sentiment rather than a fundamental shift. In the near term, be prepared for modest volatility, especially around US data releases and major central bank meetings. There have been too many false starts regarding BoJ changes to react prematurely. Until bond purchases lead to actual rate hikes or the USD loses support from high real yields and geopolitical hedging, the bias will lean away from the JPY. Keep an eye on key levels and be alert for narrative shifts during central bank communications. Create your live VT Markets account and start trading now.

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