USD/JPY has been highly volatile since Trump stepped back into the Oval Office. Now, the currency pair is caught between hawkish statements from the Bank of Japan (BoJ), strong economic data from Japan, hawkish statements from the Fed and Trump’s tariffs.
Both the BoJ and Trump are influencing the currency pair’s movement and are likely to impact the USD/JPY more in the short term, as developments from both sides are ongoing.
Fed vs BoJ
Monetary policy from both central banks is still the main force driving USD/JPY’s price fluctuations.
- Federal Reserve
During their last meeting in January, the Federal Reserve held interest rates at 4.5%, where Chairman Powell stated his confidence in the US economy’s performance amid lagging inflation and solid growth.
This pause meant that the Fed is becoming cautious about its approach to interest rates. Fed officials have stated concerns that President Trump’s tariffs could result in a rebound in inflation and might complicate the Fed’s monetary policy moving ahead. ⁽¹⁾
The Fed Meeting Minutes from their January meeting showed that while tariffs might elevate inflation, officials noted that the appropriate monetary response would depend on whether these are one-time price increases or indicative of more persistent inflation trends. ⁽²⁾
CME Fed Watch shows that traders and investors are pricing in a 93% chance of a rate hold during the Fed’s next meeting on March 19. ⁽³⁾
- Bank of Japan
The Bank of Japan is shifting from its long-term ultra-loose policy, hiking interest rates to 0.5% during their previous meeting in January due to rising of inflation at 4%. Japanese economic data also indicate positive signs which might add support for a rate hike at their next meeting.
The BoJ remains cautious due to global economic uncertainties, including potential impacts from US tariff policies and other external factors. Governor Kazuo Ueda emphasized the need to carefully monitor these uncertainties in monetary policy decision-making. ⁽⁴⁾
- Economic Data: Dollar Weakens While Yen Rises
The USD declined due to the economic uncertainties brought on by tariffs. President Trump’s tariffs are now in motion with 25% levies imposed on Canadian and Mexican imports and 20% on Chinese imports. The news triggered a retaliation from the affected nations.
Mixed US economic data is also adding fuel to the fire. Recent reports showed that inflation rose to 3% year-on year, while Q4 GDP expanded by 2.3% quarterly, which indicated strong consumer demand and economic growth. Meanwhile, retail sales contracted by 0.9% on a monthly basis, showing weakness in the retail sector along with a rise in unemployment claims.
PMI data also came in mixed. Manufacturing PMI indicated softness in the sector, coming in at 50.3, which was lower than expected. Services PMI showed some relief, coming in better-than-expected at 53.5. ADP Employment change disappointed at 77,000, way less than expected, which added pressure to the Dollar. ⁽⁵⁾
Recent Japanese economic data has supported the Yen. In Q4 2024, Japan’s economy expanded at an annualized rate of 2.8%, indicating strong growth. Additionally, core consumer inflation reached 3.2% in January 2025, surpassing the BoJ’s 2% target. The service sector also showed significant improvement, with the sector rising to 53.7 in February, marking the fastest growth in six months. ⁽⁶⁾
Traders now await labor market data for February, set for release on March 7. Nonfarm Payrolls are expected to rise by 160k while the unemployment rate is expected to remain stable at 4%. ⁽⁷⁾
- Geopolitical Tensions
Geopolitical tensions are still a major factor as Trump’s recent 25% tariffs on Canada and Mexico and 20% tariffs on China could impact the global economy. Higher tariffs could increase inflation in the US, which could lead to higher interest rates and might support the US Dollar. However, these tariffs could hurt the US economy and global trade, which could support the Japanese Yen as a safe-haven asset during times of uncertainty. ⁽⁸⁾
For Japan, tariffs could weaken the Yen by reducing export demand, though recent US-Japan talks on investment in sectors like energy and technology might reduce some pressure (Reuters). The Yen’s safe-haven appeal could also shine if US-China trade tensions escalate, which could introduce more volatility to USD/JPY. ⁽⁹⁾
