The United States has a long-standing tradition of criticizing central banks. Meanwhile, Donald Trump has urged the Fed to lower the interest rate. Following this statement, the US Treasury is urging the Bank of Japan (BoJ) to tighten its monetary policy. Let’s discuss this topic and make a trading plan for the USDJPY pair.
The article covers the following subjects:
Major Takeaways
- The US is calling on the Bank of Japan to raise interest rates.
- Trade negotiations between Washington and Tokyo are continuing.
- The Japanese economy may slip into a recession.
- Short trades on the USDJPY pair can be considered if the price fails to return above 145.
Weekly Fundamental Forecast for Yen
When the US interferes in areas where it has little relevance, speculators often benefit. The US Treasury has stated that the Bank of Japan should continue its cycle of monetary tightening in response to domestic fundamentals, including economic growth and inflation. Higher rates will strengthen the yen and effectively rebalance bilateral trade with the United States. The topic of currency revaluation in Japan as a necessary condition for a trade agreement immediately returned to the markets. Against this backdrop, the USDJPY pair experienced a temporary pause in its upward movement.
Japan’s inflation rate is notably higher than that of any other G7 country, and its base interest rate of 0.5% is lower. However, the responsibility for addressing monetary policy issues lies with the Bank of Japan. As it is a common practice, the United States is dictating its will to other nations. Donald Trump has expressed his criticism of Jerome Powell and has called on the Fed to reduce borrowing costs by one percentage point without delay. The US Treasury is now following the lead of the US President.
However, Japan’s economy is not as robust as it may appear. In the first quarter, it contracted by 0.2%. This figure is lower than the initial estimate of -0.7%. However, the risks of a technical recession remain. A notable challenge is the intersection of robust domestic demand and declining exports, which are experiencing pressure due to tariffs.
Japan’s Real GDP
Source: Bloomberg.
The US-Japan trade talks are nearing a conclusion. If an agreement is not reached by July, universal import duties will increase to 25% for Japan. Along with the 25% tariffs on cars and the 50% tariffs on steel and aluminum, this imposes a significant strain on Japan’s economy. The US is negotiating for increased car deliveries from Japanese factories in the US in exchange for reduced tariffs.
US Car Imports
Source: Wall Street Journal.
At the same time, Kazuo Ueda’s perspective aligns with that of the US Treasury. The head of the BoJ has stressed that the overnight rate of 0.5% is suboptimal for the central bank to effectively support the economy through monetary policy easing in times of economic turbulence. However, the markets misinterpreted Ueda’s words. The reference to monetary expansion enabled USDJPY bulls to break above 145 for a while.
According to Nomura, the pair’s uptick will likely be short-lived. As Japanese investors divest US assets, coupled with the US administration’s intention to weaken the US dollar, the USDJPY pair is expected to plunge to 136 by the end of September. MUFG has set a target level of 138, while the consensus estimate of Bloomberg experts is 142 by the end of the third quarter.
Weekly USDJPY Trading Plan
The divergence in monetary policy between the Fed and the BoJ, Japanese investors’ return of capital to their home country, and the yen’s status as a safe-haven currency are contributing to the downward trend in USDJPY quotes. Therefore, short trades can be considered if the pair fails to return above 145.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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