The Japanese yen is experiencing a strong rally against the US dollar, testing the key support level at 147.20 for the first time in seven months.
I believe this surge is driven by the decline in US Treasury yields following weak February Manufacturing PMI data, which reinforced concerns about a slowdown in the US economy.
At the same time, President Donald Trump’s remarks about the yen and Chinese yuan being “unfair to the US” have added to market uncertainty, prompting Japanese officials to deny any intention of actively weakening their currency.
Given these developments, I believe the yen’s upward momentum could persist, especially if US bond yields continue to decline, exerting additional pressure on the USD/JPY pair.
Meanwhile, the Nikkei 225 has suffered significant losses, plunging 2.4% to its lowest level in five months, driven by the yen’s strength and a sharp sell-off in Japanese tech stocks following an 8% drop in Nvidia’s shares on Wall Street.
Notably, Advantest fell by 8%, SoftBank lost 5.9%, while Kioxia and Renesas declined by 3.5% and 3.6%, respectively.
In my opinion, this sharp drop highlights the fragile investor sentiment in the Japanese market, as a stronger yen erodes exporters’ profits, intensifying selling pressure on equities. If these trends persist, the Nikkei is likely to remain under pressure, especially amid rising trade tensions and weaker global demand.
On another note, markets are closely watching the outlook for protectionist trade policies, as Trump insists on maintaining high tariffs on Canada and China, while temporarily exempting Mexico until early April.
In my view, this stance heightens global growth concerns, potentially driving investors toward safe-haven assets like the Japanese yen. If these protectionist measures continue, the USD/JPY pair could face further downside, especially if concerns grow over the US economy’s ability to withstand these policies. Additionally, Trump’s pledge to balance the US budget through fiscal tightening may lead to reduced government spending, weakening the dollar in favor of the yen over the coming months.
At the same time, trade tensions between Canada and the US are escalating, with Prime Minister Justin Trudeau vowing to impose C$155 billion in retaliatory tariffs on US imports if Washington proceeds with its plans. These developments, coupled with the Reserve Bank of Australia’s cautious stance on rate cuts, reflect growing global uncertainty. However, Australian retail sales met expectations, which may limit the Australian dollar’s downside, while the yen remains favored as a safe-haven asset amid heightened volatility.
In Japan, 10-year government bond yields have climbed to 1.43% after a weak bond auction, marking the third weakest performance in a decade. This rise in yields signals waning demand for Japanese bonds, but with US yields declining, the yield differential still favors the dollar. However, sustained safe-haven flows into the yen may cap any USD/JPY upside, keeping the pair biased toward further downside.
Moreover, China has announced new tariffs of 10% and 15% on US agricultural products, causing a minor rebound in Chinese and Hong Kong markets after confirming these measures. Nevertheless, if the trade war escalates, it could ultimately hurt the US dollar, as economic slowdown fears might force the Federal Reserve to reconsider its monetary policy stance, potentially benefiting the yen further.
In the cryptocurrency market, Bitcoin and other digital assets have erased most of their recent gains following Trump’s executive order to establish a strategic crypto reserve, triggering heightened volatility. While this development is not directly linked to USD/JPY movements, in my view, any major shift in investor sentiment toward riskier assets tends to favor the yen, reinforcing its status as a defensive play.
Looking ahead, investors are monitoring key economic releases this week, including Australia’s Q4 GDP, China’s Services PMI, the Federal Reserve meeting minutes, and the US Non-Farm Payrolls report on Friday. These reports could significantly impact market sentiment, as any further weakness in US economic data may increase pressure on the dollar, giving the yen additional upside momentum.
In my view, the USD/JPY pair remains driven by a complex mix of factors, including shifts in US monetary policy, trade tensions, and global market sentiment. With the yen reaching a four-month high and ongoing concerns about US economic performance, the pair is likely to remain biased toward the downside. However, any potential policy shift by the Bank of Japan or intervention by Japanese authorities to curb yen strength could alter this trajectory. As such, the upcoming period will be critical in determining USD/JPY’s direction, with a mix of economic and geopolitical factors playing a key role in shaping its future movements.
