The USD/JPY pair trades with mild losses near 152.75 during the early Asian session on Tuesday. Nonetheless, the potential downside might be limited by optimism over a potential US-China trade deal. US President Donald Trump is expected to meet with Japanese Prime Minister Sanae Takaichi later on Tuesday. Traders will closely monitor the Federal Reserve (Fed) interest rate decision later on Wednesday. On Thursday, the Bank of Japan (BoJ) interest rate decision will be the highlight.
The US and China reached a preliminary agreement that would prevent a new round of tariffs and keep critical rare earth mineral supplies flowing to the US from China. Trump said on Monday that “I really feel good” about a deal with China, after officials unveiled a slew of agreements to ease tensions.
Trump will meet Chinese President Xi Jinping later on Thursday to decide on the framework of a trade deal. Positive developments to defuse trade tensions could boost risk appetite and undermine safe-haven currencies like the Japanese Yen (JPY).
The Fed is widely expected to cut interest rates by 25 basis points (bps) at its meeting ending on Wednesday. This would be the second rate reduction of the year, bringing the Federal Funds Rate target range down to 3.75% to 4.00%. Most economists anticipate additional rate cuts later in the year and into 2026.
On the JPY’s front, the expectation that Japan’s new Prime Minister Sanae Takaichi would maintain expansionary spending policies and resist early tightening could weigh on the JPY and create a tailwind for the pair. Reports suggest Takaichi may unveil a major stimulus package as soon as next month, potentially exceeding last year’s 13.9 trillion Yen program aimed at easing inflationary pressures on households.
The BoJ is broadly expected to hold its interest rate steady at 0.5% at its upcoming policy meeting on Thursday. Traders will closely monitor the guidance from BoJ Governor Ueda following the meeting for fresh impetus.
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.
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.
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.
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.
