The USD/JPY pair saw a resurgence, climbing past the 152.00 mark as the new week commenced, driven by US President Donald Trump's stern tariff threats. President Trump announced on Sunday his intention to impose an additional 25% tariff on all steel and aluminum imports into the United States. Additionally, he plans to introduce reciprocal duties to address perceived unfair trading practices. These developments have put pressure on the Japanese Yen, which faces challenges from both domestic and global economic factors.
The Bank of Japan (BoJ), Japan's central bank, plays a critical role in shaping the country's monetary policy. Since 2013, the BoJ has embraced an ultra-loose monetary policy strategy, aiming to stimulate the economy and spur inflation in a low-inflationary environment. This policy involves Quantitative and Qualitative Easing (QQE), a process where the BoJ prints money to purchase assets such as government or corporate bonds to provide liquidity. In 2016, the BoJ intensified its approach by implementing negative interest rates and directly controlling the yield of its 10-year government bonds.
Despite these measures, renewed worries about President Trump's trade tariffs have exerted downward pressure on the Japanese Yen. The recent US Nonfarm Payrolls (NFP) report showed a decline in the Unemployment Rate to 4% from 4.1%, alongside a rise in Average Hourly Earnings by 4.1% during the reported month, exceeding expectations. However, the number of employed individuals increased by only 143,000 in January, falling short of the anticipated 170,000 and significantly below the revised 307,000 increase recorded in the previous month.
The divergent policy expectations between the BoJ and the Federal Reserve are expected to limit deeper losses for the Japanese Yen. While the Federal Reserve maintains a more traditional approach to monetary policy, the BoJ's expansive stimulus measures have led to a depreciation of the Yen against its main currency peers. Japan's inflation-adjusted real wages rose by 0.6% year-on-year in December, marking the second consecutive monthly gain and bolstering the case for potential tightening by the BoJ.
The BoJ's January meeting summary echoed this sentiment, with board members discussing the possibility of raising interest rates further. This discussion supports the Japanese Yen amid growing inflationary pressures. Meanwhile, the International Monetary Fund (IMF) has cautioned Japan to remain vigilant regarding potential spillover effects from rising global market volatility, which could impact liquidity conditions for its financial institutions.
In 2024, Mexico, China, and Canada together accounted for 42% of total US imports, highlighting the interconnected nature of global trade and its implications for currency markets. The ongoing trade tensions and tariff threats underscore the delicate balance that central banks like the BoJ must maintain in navigating economic challenges.