Yen Remains Heavy as BOJ Dovishness Meets Trade Headwinds

Key Takeaways:

*The BOJ remains hesitant to tighten policy despite core inflation near 3.7%, as wage growth lags and trade risks mount, reinforcing the yen’s role as a low-yield funding currency.

*With Japan’s policy rate at just 0.5% versus the Fed’s 4.25%–4.50%, the wide yield differential continues to drive outflows from the yen into the U.S. dollar.

*Upcoming U.S. tariffs and weak machinery orders highlight Japan’s external vulnerabilities, constraining BOJ action and weighing on yen sentiment.

Market Summary:

The Japanese Yen extended its weakening trend as persistent yield differentials and a cautiously dovish Bank of Japan (BOJ) kept the currency under broad pressure. Despite sticky domestic inflation, with core CPI hovering near 3.7% in May, BOJ officials remain hesitant to commit to further rate hikes amid fragile wage growth and rising geopolitical uncertainty.

Monetary policy divergence continues to weigh heavily on the yen. The BOJ’s benchmark rate remains at 0.5%, far below the U.S. Fed’s 4.25%–4.50% corridor. This interest rate gap has sustained capital flows out of Japan and into dollar-denominated assets, particularly as U.S. inflation remains resilient. Market participants are closely eyeing the BOJ’s upcoming July 30–31 meeting for any upward revision to its inflation outlook, but most analysts expect policymakers to stay on the sidelines barring significant wage acceleration.

Trade tensions further complicate Japan’s outlook. With U.S. tariffs on Japanese exports set to take effect on August 1, sentiment toward Japan’s export sector remains fragile. Recent data showing a -0.6% MoM drop in machinery orders underscores concerns about slowing domestic demand and weakening investment appetite.

In the near term, the yen’s trajectory remains highly sensitive to U.S. macro releases, especially inflation and employment data, as well as any perceived shift in the BOJ’s policy tone. Barring a policy surprise from Tokyo, the JPY is likely to retain its status as a funding currency amid low domestic yields and trade headwinds.

Technical Analysis

USDJPY, H4

USD/JPY is extending its bullish momentum, climbing firmly above the 147.70 resistance zone and eyeing the psychologically significant 148.60 level. The recent breakout follows a steady series of higher highs and higher lows, reinforced by a rising trendline that has remained intact since late June. Price action is well-supported by the 20- and 50-period moving averages, while the broader structure suggests renewed bullish conviction after a mid-June pullback. With the pair holding above all key moving averages, technical structure continues to favor upside continuation.

Momentum indicators lend further support to the bullish narrative. The Relative Strength Index (RSI) has risen to 68, just below overbought territory, signaling strong momentum without yet flashing exhaustion. This suggests that while the pair may be extended in the short term, there is still room for further gains before any meaningful correction is likely. Meanwhile, the MACD remains in positive territory with a bullish alignment — the MACD line has crossed above the signal line, and histogram bars are printing green, though momentum appears to be plateauing somewhat.

From a structural standpoint, the break above 148.00 opens the path toward 148.60, the next notable resistance zone. If price consolidates above this level, it could signal a broader continuation toward yearly highs. However, a failure to sustain above 148.00 could invite short-term pullbacks, with immediate support at 146.90 and then near the trendline confluence around 146.00. 

Resistance Levels: 148.00, 148.60

Support Levels: 146.90, 146.00