13 Feb 2025

• The Japanese Yen strengthens on Thursday in reaction to stronger PPI print from Japan. 
• Worries about Trump’s trade tariffs might hold back the JPY bulls from placing fresh bets.
• Reduced Fed rate bets could underpin the USD and should help limit losses for USD/JPY.
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The Japanese Yen (JPY) continues to experience a steady increase against the US Dollar (USD), which, coupled with renewed selling pressure on the USD, has driven the USD/JPY pair below the 154.00 mark as the European session approaches on Thursday. The recently released Producer Price Index (PPI) from Japan strengthens expectations that the Bank of Japan (BoJ) may implement further interest rate hikes, providing additional support for the JPY. Additionally, a decline in US Treasury bond yields contributes positively to the lower-yielding JPY.

However, concerns regarding the potential effects of tariffs imposed by US President Donald Trump on steel and aluminum imports, along with anticipated reciprocal tariffs, pose challenges for the JPY. Furthermore, the expectation that the Federal Reserve (Fed) will maintain its hawkish approach, reinforced by strong US consumer inflation data released on Wednesday, is likely to mitigate significant losses for the USD and the USD/JPY pair. Consequently, caution is advised before making any substantial bets on a decline in the USD/JPY pair from the recent one-week high reached the previous day.

A preliminary report published this Thursday indicated that Japan's Producer Price Index (PPI) experienced a month-on-month increase of 0.3% in January, and a year-on-year rise of 4.2%. This development suggests a potential escalation of inflationary pressures within Japan, which, in conjunction with recent wage growth statistics, supports the argument for further interest rate increases by the Bank of Japan (BoJ). Additionally, BoJ Governor Kazuo Ueda and Deputy Governor Himino have recently hinted at the possibility of another rate hike, contingent upon the alignment of economic conditions and price levels with their forecasts.

However, there appears to be hesitance among Japanese Yen bulls, primarily due to concerns that US President Donald Trump's imposition of no-exemption tariffs on commodity imports could jeopardize Japan's economic stability. On the other hand, the US Bureau of Labor Statistics reported on Wednesday that the headline US Consumer Price Index rose by 0.5% in January, marking the highest increase since August 2023 and surpassing expectations. The annual rate increased to 3% from 2.9% in December, while the core CPI, which excludes food and energy prices, surged to 3.3% from a year ago, exceeding the anticipated 3.1%.

This data highlights persistent inflation, which, coupled with mostly positive US employment figures released on Friday, suggests that the Federal Reserve is likely to maintain its hawkish approach. Fed Chair Jerome Powell stated that the central bank aims to keep monetary policy restrictive for the time being, as inflation, although decreasing, remains above the 2% target. Following the robust US CPI report, the yield on the benchmark 10-year US government bond recorded its largest single-day increase since December, thereby widening the interest rate differential between the US and Japan. Investors are now anticipating the upcoming US PPI report, which, along with the US Weekly Initial Jobless Claims, may impact the US Dollar and influence the USD/JPY exchange rate.