The Japanese yen continued its decline against the US dollar during early European trading on Wednesday, with the USD/JPY pair climbing toward the mid-145 range. This weakness comes amid market optimism over the potential continuation of a ceasefire between conflicting parties in the Middle East, which has boosted risk appetite and reduced demand for safe-haven assets such as the yen.
Despite the current decline, the yen’s losses remain limited due to growing expectations that the Bank of Japan (BOJ) may raise interest rates again, especially following the release of the Services Producer Price Index (PPI), which rose by 3.3% year on year in Maymarking the third consecutive month of increase. This reflects ongoing domestic inflationary pressures and strengthens the likelihood of further monetary tightening in the near future.
Conversely, the US dollar remains under pressure due to expectations that the Federal Reserve may move to cut interest rates later this year, which could lend medium-term support to the yen.
In a related development, the minutes of the BOJ’s monetary policy meeting released today revealed that some board members expressed concern about the potential impact of new US tariffs on Japan’s economy, citing its fragile growth. Some policymakers also noted that consumer inflation in Japan is running at higher than expected levels, driven by rising prices of key commodities.
Data released last week showed that Japan’s national Consumer Price Index (CPI) rose by 3.5% year-on-year in May, exceeding the central bank’s 2% target. The core index excluding food reached its highest level since January 2023, while the core core inflation (excluding food and energy) stood at 3.3%.
In this context, BOJ board member Naoki Tamura stated that inflation exceeded expectations in May. He confirmed that some of the uncertainty tied to external factors, such as US trade policies, has started to ease. However, economic prospects remain unclear. Tamura added that the BOJ may need to take more decisive action if price pressures intensify.
Meanwhile, Federal Reserve Chair Jerome Powell stated in his testimony before Congress that the Fed expects inflation to rise in the near term and sees no urgent need to cut interest rates for now. His comments followed earlier suggestions by several Fed members hinting at a potential rate cut in July, though Powell’s remarks offered little support for the US dollar.
On the geopolitical front, a ceasefire agreement between regional parties in the Middle East recently came into effect and appears to be holding, despite some on the ground developments. While markets remain cautious about potential escalations, ongoing geopolitical uncertainty may continue to offer some support to the Japanese yen as a safe-haven currency especially amid diverging monetary policies between the Bank of Japan and the US Federal Reserve.
Stay informed about global markets through our previous analyses. and Now, you can also benefit from LDN company services via the LDN Global Markets trading platform.
