USD/JPY trades flat above 158.00 amid trade war fears

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The USD/JPY pair holds steady near 158.15 during the early Asian session on Tuesday. The pair steadies as safe-haven flows offset speculations that Prime Minister Sanae Takaichi may soon call a snap election. Traders await the ADP weekly report later on Tuesday for fresh impetus.

USD/JPY flat lines around 158.15 in Tuesday’s early Asian session.
Trump threatened new tariffs on eight European countries, raising trade concerns.
The BoJ is expected to leave its interest rate unchanged on Friday.

US President Donald Trump said on Saturday that he would impose an additional 10% import tariff from February 1 on goods from Denmark, Norway, Sweden, France, Germany, the Netherlands, Finland and the United Kingdom (UK) until the United States (US) is allowed to buy Greenland. The headline raises fears of a major trade war as Europe prepares to push back after Trump threatened escalating tariffs on allies, which might boost safe-haven currencies such as Japanese Yen (JPY) against the Greenback.

Traders will closely monitor the possibility that Takaichi may call a snap election next month to consolidate power. Her perceived preference for expansionary fiscal policies and large-scale stimulus raises concerns about Japan's public finances and could further weaken the Japanese Yen and create a tailwind for the pair.

The Bank of Japan (BoJ) interest rate decision will be in the spotlight on Friday. The Japanese central bank is expected to leave the key interest rate unchanged at around 0.75%. It raised the rate by 25 basis points (bps) at the last meeting in December.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.