Mixed Performance by the Yen Ahead of Inflation and the BoJ’s Meeting

Traders of the yen are now looking ahead to Japanese inflation on 18 September and the meeting of the Bank of Japan (‘the BoJ’) the following day. This article summarises recent developments affecting the yen and the Japanese economy in general, then looks briefly at the charts of USDJPY and EURJPY.

Late on 16 September GMT, Japan’s balance of trade for August was significantly less negative than expected:

The consensus had been for a deficit of around ¥514 billion, whereas the actual result was less than half that at negative ¥243 billion. This is a moderately positive sign that the worst impact of new American tariffs might be over, especially considering that Japan was among the first large, advanced economies to confirm a trade deal with the USA. Exports declined only 0.1% last month, while imports were reduced by 5.2%.

Relative political instability in Japan has moved out of focus in recent weeks as traders have concentrated once again on monetary policy more. The Fed is now widely expected to call for three cuts by the end of the year, while considerable intrigue remains as to when the BoJ will next hike rates. A hike on 19 September seems extremely unlikely, but the majority of traders are currently pricing in a single hike at the meeting after that on 30 October. If correct, that would take the BoJ’s key policy rate to 0.75% and most likely mean a difference of 3-3.25% with the Fed.

Meanwhile, Japanese inflation definitely seems to have peaked in January 2025, having been in a mostly consistent though shallow downtrend since then. Although the rate of inflation is falling, it doesn’t appear to be fast enough to justify the BoJ maintaining its longstanding ultra-easy policy, with the bank having embarked on a very gradual cycle of tightening.

Upcoming data on inflation in Japan late on 18 September GMT centres on the annual headline figure, which is expected to drop to 2.8%. One of the primary factors behind relatively high inflation in Japan recently is food, so with the government’s efforts to moderate the price of rice in the near future the rate will probably remain above 2% for at least the next several months, although it’s unlikely to start rising significantly again, especially if the BoJ does hike next month.

Dollar-yen Reaches New Lows; ¥146 in View

USDJPY reached its lowest since late July early on 17 September as Japanese trade data weren’t as negative as expected and traders were almost certain that the Fed would call for a single cut at its meeting that evening. Although some concern remains about the Japanese economy, particularly with exports having declined for four consecutive months, the shift in recent weeks has been in sentiment on the American economy and particularly the job market.

August’s channel between about ¥146.30 and ¥148.80 still seems to be active for now, so an immediate move lower might be questionable unless there’s a significant surprise from upcoming Japanese inflation or the BoJ’s meeting. Volatility has been low recently, which is a normal situation over the summer, but it might return around the meetings of the central banks coming up in the next few days.

The next directional movement seems more likely to be upward within the channel than downward, but this very much depends on how the Fed’s upcoming statement and comments are received. If traders interpret clear signals confirming three consecutive cuts by the Fed for the rest of the year, more short-term losses might be possible instead.

Euro-yen Retests Record Highs

The euro has strengthened recently against various other major currencies as traders interpreted the ECB’s latest meeting last week as signalling the end of the cycle of loosening. While the BoJ is likely to continue hiking later this year – probably the next hike coming in October – there has been some focus on recently weaker trade data from Japan. The European job market, on the whole, also seems to be relatively strong compared to some other major economies such as the USA. It’s very unlikely that the difference in rates for EURJPY will go much below 1% for many months.

It’s questionable whether euro-yen’s uptrend has ended and morphed into a sideways trend because there haven’t been any lower lows since the peak in late July and the price remains close to the all-time record high around ¥174. However, immediate strong continuation upward is also in doubt given a clear though not extremely strong overbought signal from the slow stochastic and Bollinger Bands. The next resistance above the all-time high is hard to pinpoint.

The obvious candidate for support in the short to medium term is ¥170 as a round number, and the source of renewed but weaker demand for buying in early August. More than dollar-yen, the next movements for euro-yen probably depend heavily on upcoming Japanese inflation and the BoJ’s meeting.

This article was submitted by Michael Stark, financial content leader at Exness.

The opinions here are personal to the writer; they do not represent the opinions of Exness. This is not a recommendation to trade.