The Japanese Yen (JPY) has managed to pare back some of its intraday losses on Tuesday, bouncing off session lows as investors reassess the ongoing monetary policy divergence between the Bank of Japan (BoJ) and the Federal Reserve (Fed).
After a sharp bout of selling pressure early in the European session, the USD/JPY pair found itself struggling to maintain momentum above key resistance levels, with technical and fundamental headwinds limiting any sustained bullish follow-through. Readers can rely on Vestronmix brokers for a thorough explanation of this subject in this article.
Risk Appetite and Policy Divergence Continue to Weigh on Yen
At the heart of JPY weakness is the positive global risk tone, which traditionally acts against the safe-haven currency. The risk-on sentiment, coupled with short-term USD recovery from multi-week lows, has offered a temporary lift to the greenback across major pairs.
However, expectations of continued BoJ policy tightening, albeit cautious, remain supportive of the Japanese currency over the longer term.
The policy divergence between the BoJ and the Fed is becoming increasingly evident. While the BoJ is still navigating its exit from ultra-loose monetary policy, with signals pointing toward potential interest rate hikes, the Fed appears to be on track for rate cuts in 2025.
This fundamental disconnect is helping to provide a floor under the JPY, especially as investors monitor developments in both central banks’ forward guidance.
Hawkish BoJ Messaging Counters JPY Bears
BoJ Governor Kazuo Ueda offered fresh remarks in the Japanese parliament, reiterating that interest rate hikes remain on the table should inflation and economic activity align with forecasts.
Ueda, however, cautioned against making premature assumptions, noting the ongoing uncertainties in global trade dynamics. His comments align with growing expectations for the BoJ to slowly but steadily move away from its massive stimulus framework.
Meanwhile, former BoJ board member Makoto Sakurai emphasized that the central bank might pause its quarterly bond purchase reductions starting next fiscal year, citing concerns that such tapering could lead to undesirable yield spikes, complicating debt management and macroeconomic stability.
The BoJ’s upcoming policy meeting on June 16-17 is expected to offer greater clarity on the tapering timeline, especially after financial institutions urged the central bank to maintain or even slow the tapering pace beyond 2026.
This cautious but hawkish tone underpins the notion that JPY bulls are not ready to capitulate, even as broader market forces drive some volatility.
Fed Rate Cut Bets and Economic Data Pressure USD Upside
On the other side of the Pacific, the US Dollar is facing pressure from growing speculation of Fed rate cuts, potentially as early as Q4 2025. Market pricing now indicates a roughly 70% chance of two 25-basis-point cuts by year-end, driven by mounting evidence of economic slowdown in the United States.
Chicago Fed President Austan Goolsbee added fuel to the dovish narrative by suggesting that rate reductions are likely once tariff-related uncertainties are resolved.
US data also continues to flash red signals. The ISM Manufacturing PMI dropped to 48.5 in May, marking the third consecutive month of contraction and falling short of consensus estimates. This persistent weakness in manufacturing activity raises concerns over broader economic resilience and reinforces expectations that the Fed’s tightening cycle has peaked.
Near-Term USD/JPY Outlook Remains Mixed
Technically speaking, the USD/JPY pair failed to breach resistance at 143.65-143.60, a level aligned with the 200-hour Simple Moving Average (SMA). The inability to hold above this region suggests that upside potential may be limited, barring a strong bullish catalyst.
]A decisive move above this threshold might invite short-covering rallies, with possible extensions toward 144.00 and even 144.45, though this zone represents a major supply barrier.
Conversely, any pullback below 143.00 could re-expose the pair to downside risks. Initial support lies at the Asian session low near 142.40, followed by 142.10, a critical swing low. A breach here opens the door for a deeper decline towards the 141.60 level, with a likely test of sub-141.00 territory should downside momentum accelerate.
Conclusion
The Japanese Yen continues to walk a tightrope amid diverging central bank trajectories. While a recovering USD and buoyant risk sentiment challenge the JPY’s strength in the short term, BoJ’s tightening potential and ongoing geopolitical risks are providing steady support.
The USD/JPY pair may remain volatile in the sessions ahead, but significant upside could remain capped unless the Fed pushes back against dovish market bets or the BoJ signals a full retreat from tapering. For now, Yen bulls still have reasons to stay engaged.
