The Japanese yen held firm around 142.9 per dollar on Thursday, after rising nearly 1% in the previous session, buoyed by a broad retreat in the U.S. dollar following a string of weaker-than-expected economic indicators from the United States.
Yen strengthens as dollar slips on weak US data
Recent data showing a sharp deceleration in private-sector job creation, along with an unexpected contraction in the U.S. services sector, has fueled concerns that trade policy uncertainty and rising tariffs may be starting to exert a drag on the broader American economy. The resulting decline in U.S. Treasury yields has in turn supported demand for the yen, which tends to benefit during periods of risk aversion and lower global yields.
On the domestic front, however, the outlook for Japan remains clouded by persistent structural challenges. Government data released earlier in the week showed that real wages in Japan fell for the fourth consecutive month in April, as inflation continued to outpace nominal income growth. The erosion in households’ purchasing power raises concerns about the strength of domestic consumption—traditionally a key pillar of Japan’s economic recovery strategy. The weak wage data also dampens hopes that the recent round of spring wage negotiations, which saw historically large nominal pay hikes, would be enough to support sustainable inflation and private-sector-led growth.
These developments further complicate the Bank of Japan’s path toward policy normalization. While the central bank ended its negative interest rate regime in March 2025 and has signaled a shift toward gradual tightening, it continues to walk a delicate line between addressing inflation pressures and safeguarding a fragile recovery. Governor Kazuo Ueda reiterated earlier this week that the BOJ remains prepared to raise interest rates further if incoming data align with its economic and inflation forecasts. However, he emphasized that any policy adjustments would be made cautiously and contingent on clearer signs of robust wage growth and stable demand-driven inflation—both of which remain uncertain in the current environment.
Geopolitical tensions
Meanwhile, geopolitical uncertainty continues to hang over Japan’s economic prospects. The global trade landscape has been shaken by the reemergence of protectionist measures, most notably from the U.S., where President Donald Trump’s administration recently announced significant tariff hikes on steel and aluminum and is reportedly considering broader measures. Japan, as a key player in global manufacturing and trade, remains exposed to potential fallout from such disruptions, particularly in sectors like automobiles, electronics, and industrial equipment.
Despite these headwinds, Japan’s equity markets have remained relatively resilient, and corporate earnings have held up, in part due to a weaker yen that supports export competitiveness. However, policymakers remain wary of excessive currency depreciation, especially as imported inflation continues to strain household budgets. While the Ministry of Finance has not intervened directly in currency markets since late 2022, officials have reaffirmed that they are closely monitoring exchange rate developments and stand ready to act against excessive volatility.
Looking ahead, market participants will be watching closely for further signals from the BOJ at its upcoming meeting, as well as key data on inflation, consumption, and labor market conditions. In the near term, the yen is expected to remain sensitive to fluctuations in U.S. economic data, global risk sentiment, and any major developments in international trade policy.
