BoJ Rate Hike Expectations Fade. Forecast as of 14.07.2025
The Bank of Japan is reluctant to raise rates. The Japanese government refrains from giving in to pressure during negotiations with the US. USDJPY bears are facing strong headwinds. Meanwhile, the Japanese parliamentary elections are approaching. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The yen is losing ground to its G10 counterparts.
- US tariffs are forcing the BoJ to delay a rate hike.
- The Japanese elections may end in resignation.
- Accelerating US CPI will give a buy signal for the USDJPY pair.
Weekly Fundamental Forecast for Yen
According to Donald Trump, financial markets enjoy tariffs, and the recent new all-time high in the S&P 500 index suggests that this may be the case. However, there is one currency that has consistently exhibited unfavorable trends: the yen. The Japanese yen has been the weakest currency among the G10 currencies since July 4. Tokyo’s reluctance to compromise in its negotiations with Washington is not the sole factor contributing to the correction in the USDJPY.
Performance of G10 Currencies Against US Dollar
Source: Reuters.
US tariff policies are hindering the Fed from lowering interest rates and the Bank of Japan from raising them. Despite Bloomberg’s insider information that rising prices for rice and other food items will force the BoJ to raise its inflation forecast, the central bank is maintaining its current course. The outcome of the trade negotiations is not yet known; it remains uncertain whether the 25% universal import duty and 25% tariffs on cars will be reduced. Will these tariffs remain in effect after August 1 and destroy the Japanese economy?
While the Bank of Japan is hesitant, the interest rate differential between the US and Japanese debt markets is favoring carry traders and USDJPY bulls. This is particularly relevant given the growing skepticism among market participants regarding the Fed’s monetary policy easing in 2025. In light of robust US labor market data, investors are now directing their attention toward US inflation. Its acceleration in June will reinforce the US dollar against major world currencies, and the yen is no exception.
US Inflation Forecast
Source: Bloomberg.
Along with the uncertainty surrounding the outcome of trade negotiations between Washington and Tokyo and the significant interest rate differential, political uncertainty is also driving the correction of the USDJPY. On July 20, elections will be held for the upper house of parliament in Japan. The ratings of the ruling Liberal Democratic Party (LDP) are declining. There is a strong possibility that the opposition will win the vote. As a result, Prime Minister Shigeru Ishiba will have to step down from his position, and the newly formed government will likely implement measures to stimulate the economy.
Tariffs will also be a crucial factor in this matter. Japan is unlikely to agree to maintain 25% tariffs on car imports, as these exports to the US account for a third of its total exports. If they are upheld, Shigeru Ishiba’s political career will inevitably come to an end. However, Donald Trump has made it clear that he is not inclined to consider any opinions other than his own. The recent developments have dealt a severe blow to USDJPY bears.
The market is preparing for the release of US and Japanese inflation data for June. The likelihood of the Bank of Japan tightening monetary policy is diminishing rapidly. If the odds evaporate while the Fed reduces the federal funds rate, the yen will face hard times.
Weekly USDJPY Trading Plan
The acceleration of June inflation in the US is likely to spur a rally in the USDJPY towards 149 and 150.5, allowing traders to open long positions, adding them to the long trades initiated on a breakout of 146.5.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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