JPY Rises on Fiscal Jitters and Trade Tensions

Key Takeaways:

*USD/JPY weakens as JGB yields surge, with the 20-year yield hitting a 25-year high, narrowing the yield gap with U.S. Treasuries and supporting the yen.

*Rising fiscal concerns ahead of Japan’s July 20 election are ironically driving safe-haven flows into JPY, as investors brace for increased volatility and budget uncertainty.

*Trump’s tariff threat on Japanese goods has revived trade tensions, boosting defensive positioning and further enhancing the yen’s appeal as global risk sentiment deteriorates.

Market Summary:

The Japanese Yen extended its recent gains, with USD/JPY retreating sharply as bond market stress, political uncertainty, and global risk aversion drive a resurgence in safe-haven demand. The yield on 20-year Japanese Government Bonds (JGBs) surged to its highest level in 25 years, underscoring deepening concerns over Japan’s fiscal outlook ahead of the July 20 election. Rising domestic yields have supported the yen by narrowing interest rate differentials, particularly as U.S. Treasury yields ease on growing Fed rate-cut expectations.

Fiscal debate remains front and center in Japan’s political discourse. With the ruling coalition proposing fresh cash handouts and opposition parties pushing tax cut agendas, markets are growing uneasy about the sustainability of public finances. Yet paradoxically, the fiscal anxiety has bolstered the yen as investors seek safety in JPY-denominated assets amid a broader global rotation out of risk.

Adding to bullish momentum, President Trump’s escalating tariff rhetoric—particularly a 25% levy on Japanese goods set for August 1—has sparked concerns about global trade fragmentation. Markets are increasingly positioning defensively, with the yen benefiting as a traditional haven during periods of geopolitical and trade tension.

The Bank of Japan remains cautious, but rising yields and inflationary pressures may eventually prompt a subtle policy recalibration. For now, the BoJ’s inaction is outweighed by bond market signals and the yen’s safe-haven appeal. Traders are closely watching the upcoming 20-year JGB auction, where a strong bid-to-cover ratio could affirm confidence in Japan’s debt market and reinforce yen strength.

In the near term, USD/JPY is likely to stay under pressure, especially if U.S. yields continue to soften and risk-off flows persist. The yen’s trajectory will depend heavily on election outcomes, trade headlines, and signs of further bond market strain, all of which could amplify the currency’s bullish momentum.

Technical Analysis 

USDJPY, H4

USD/JPY has eased from its recent peak near 146.90, retreating toward the 145.85–146.00 support zone. The pair remains above the rising trendline and key moving averages, but bullish momentum has begun to wane following a sharp run-up last week. Price action now hovers near the 50-day SMA, with short-term consolidation likely unless buyers regain control.

The Relative Strength Index (RSI) has fallen sharply from overbought levels and now sits near 52, suggesting fading bullish conviction. The drop below the 60 threshold signals that the prior rally is losing steam, and further declines could confirm a shift in sentiment.

MACD signals reinforce the pullback risk. A bearish crossover has formed, with the MACD line now dipping below the signal line and the histogram turning negative. This suggests that momentum has tilted in favor of sellers, at least in the near term.

For now, USD/JPY remains in a technical holding pattern. A sustained break below the 145.85 level could expose the next support at 145.00 and the rising trendline. On the upside, any recovery above 146.90 would be needed to reassert bullish dominance and test 147.70 resistance level.

Resistance levels: 146.90, 147.70

Support levels: 145.00, 144.90