The Japanese Yen (JPY) attracted fresh buyers at the start of a new week and remained within striking distance of its highest level since late September 2024 hit against the broadly weakening US Dollar (USD) last Friday. Concerns about the rapidly escalating US-China trade war and its impact on the global economy continued to support traditional safe-haven assets, including the JPY. Further, hopes that Japan might reach a trade deal with the US turned out to be another factor offering support to the JPY.

Meanwhile, signs of broadening inflation in Japan keep the case for further interest rate hikes by the Bank of Japan (BOJ) open. In contrast, investors have been pricing in the possibility of aggressive policy easing by the Federal Reserve (Fed) amid concerns that the escalating US-China trade war will hamper US economic growth. This would result in a further narrowing of the interest rate differential between Japan and the US, suggesting that the path of least resistance for the low-yielding JPY is to the upside.

Japanese Yen supported by global flight to safety, BoJ rate hike bets

China's 84% ​​tariffs on US goods came into effect on Thursday, while US President Donald Trump raised duties on Chinese imports to an unprecedented 145%. The developments fueled concerns about the potential economic impact of an escalating trade war between the world's two largest economies and drove some safe-haven flows into the Japanese Yen.

Investors remain optimistic about a positive outcome from US-Japan trade talks. In fact, Trump said last week that tough but fair parameters are being set for negotiations. Additionally, US Treasury Secretary Scott Bessent said that Japan may be a priority in tariff negotiations, fueling hopes for a possible US-Japan trade deal and further supporting the JPY. Japanese Prime Minister Shigeru Ishiba warned on Monday that "US tariffs have the potential to disrupt the world economic order.

" Separately, Japanese Finance Minister Shunichi Kato said that "the US and Japan share the view that excessive foreign exchange volatility is undesirable." In addition, Japanese Economy Minister Ryosei Akazawa stated that "foreign exchange issues will be handled by Finance Minister Kato and US Treasury Secretary Scott Bessent." Meanwhile, the Bank of Japan's preliminary report released last Thursday showed that annual wholesale inflation accelerated to 4.2% in March. This is a sign of persistent cost pressures, which, together with strong wage growth, should contribute to rising domestic inflationary pressures and allow the BoJ to continue raising interest rates this year.

In contrast, the latest reading of the US Consumer Price Index showed that inflation slowed sharply in March. This comes on top of weakening confidence in the US economy and should allow the Federal Reserve to resume its rate-cutting cycle. Moreover, market participants are now pricing in a possible 90 basis point rate cut by the end of this year. The divergent BoJ-Fed policy expectations turned out to be another factor that benefited the lower-yielding JPY. On the other hand, the US dollar languished near its lowest level since April 2022, hit on Friday. This, in turn, dragged the USD/JPY pair back closer to multi-month lows during the Asian session on Monday and supports prospects for a further decline.(Newsmaker23)

Source: FXstreet