The Japanese yen strengthened toward 147 per dollar on Wednesday, marking its second consecutive session of gains, as the greenback weakened broadly following a softer-than-expected US inflation report that fueled speculation the Federal Reserve may lean toward further easing later this year.
Japanese yen edges higher as dollar retreats
The US CPI data showed moderating core and headline inflation in April, reinforcing views that the Fed has additional room to lower interest rates if needed, prompting a retreat in US Treasury yields and undermining the dollar’s recent momentum.
Investors also remained attentive to developments on the global trade front, after the US and China agreed to temporarily lower tariffs for a 90-day period in an attempt to de-escalate ongoing trade tensions. While the move was initially welcomed by markets, uncertainty lingers over the sustainability of the agreement, with questions over whether both sides can reach a broader, more permanent resolution once the temporary truce expires. The yen, often seen as a safe-haven currency during periods of geopolitical and trade-related uncertainty, benefited from lingering caution among investors.
On the bilateral front, tensions between Japan and the United States also resurfaced, as Japanese Prime Minister Shigeru Ishiba made a firm statement rejecting the prospect of a preliminary trade agreement with the US that does not include provisions on the auto sector. Ishiba emphasized that Tokyo expects Washington to remove its long-standing 25% tariff on Japanese cars, a point of friction that could complicate negotiations between the two allies, particularly as the Trump administration signaled it would prioritize American manufacturing competitiveness in any future trade deals.
Domestic effects
Domestically, Japan’s inflationary dynamics showed further signs of easing, with data revealing that producer prices rose 4% year-on-year in April, slowing from 4.2% in March and marking the weakest pace since December 2024. The deceleration was primarily driven by lower input costs, including fuel and raw materials, reflecting easing global commodity prices and a moderation in supply chain pressures. The data added to the growing view that upstream price pressures are softening, although the pass-through to consumer prices remains limited amid still-muted domestic demand.
Meanwhile, the Bank of Japan maintained its cautious stance on monetary policy, reiterating its commitment to supporting the economy through ultra-loose measures. The central bank highlighted heightened uncertainties surrounding both domestic and global economic activity, as well as inflation dynamics, signaling it is in no rush to alter its current policy trajectory despite recent market speculation about a potential reduction in its bond-purchasing program. BOJ officials also noted that while the weaker yen has contributed to some upward pressure on import prices, it has yet to sustainably lift inflation expectations, reinforcing the bank's cautious tone.
Looking ahead, analysts expect the yen’s performance to remain sensitive to the evolving US interest rate outlook, global trade negotiations, and any signs of shifting rhetoric from the BOJ regarding its long-standing accommodative policies.
