Yen strengthens despite weak trade data

The Japanese yen firmed to around 147.5 per dollar on Wednesday, extending gains from the previous session even as fresh trade data painted a mixed picture. Exports fell 2.6 percent year-on-year in July, the sharpest decline in over four years, as sweeping U.S. tariffs curbed overseas demand for Japanese goods ranging from automobiles to electronics.

The slump highlights the challenges facing Japan’s export-driven economy, which has been highly exposed to shifts in U.S. trade policy. Imports also contracted by 7.5 percent, marking the fourth annual decline this year, though the figure was better than forecasts for a 10.4 percent slump, suggesting relatively resilient domestic demand for certain categories such as energy and machinery.

Beyond trade flows, domestic economic indicators offered a brighter spot. Core machinery orders—a closely watched leading indicator of capital expenditure—unexpectedly rose in June after two straight months of declines.

The rebound raised hopes that corporate investment may hold up despite weakening external demand, providing a partial cushion for the broader economy. Still, lingering uncertainty around global supply chains, rising input costs, and the property slowdown in China remain downside risks for Japanese firms.

On the policy front, the Bank of Japan continues to send mixed signals, leaving markets divided on its next move. Governor Kazuo Ueda has reiterated his cautious stance, stressing that “underlying inflation” remains below the BOJ’s 2 percent target. While headline inflation has picked up in recent months, policymakers remain concerned about whether wage growth and domestic demand are strong enough to sustain price gains over the medium term.

Some board members have signaled a willingness to normalize policy gradually, but others prefer to keep conditions accommodative amid lingering global uncertainty and the drag from U.S. tariffs.

For currency markets, the yen’s near-term direction will likely hinge on the Federal Reserve’s upcoming Jackson Hole symposium and any signals from Chair Jerome Powell on the pace of U.S. monetary easing. A more dovish Fed stance could narrow interest rate differentials and provide additional support for the yen. Conversely, if Powell pushes back against expectations for aggressive cuts, the dollar could regain strength and reverse part of the yen’s latest gains.