USD/JPY Fundamental Daily Forecast – Risk-Off Sentiment Pressuring Dollar/Yen

The Dollar/Yen is edging lower on Tuesday as risk-off sentiment took hold amid declines in Asia-Pacific stock markets. Tuesday is quiet on the data front. However, investors will look ahead to the upcoming U.S. inflation report and China GDP report later this week. The Forex pair is easing off a 24-year high at 137.751 reached the previous session.

At 08:41 GMT, the USD/JPY is trading 137.194, down 0.226 or -0.16%. On Monday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $68.11, down $0.65 or -0.94%.

Divergence between Fed, BOJ Expected to Continue after Election

On the bearish side, traders appear to view the movement of Japan’s ruling Liberal Democratic Party majority in the upper house as an endorsement of the BOJ’s ultra-loose monetary policy. This is significant because it reaffirms the divergence between the hawkish Federal Reserve and the dovish Bank of Japan.

Japan, US Agree to Address Currency

In breaking news, the U.S. Treasury Secretary Janet Yellen and Japanese Finance Minister Shunichi Suzuki agreed on Tuesday to work together to address rising food and energy prices, as well as volatility in currency markets, exacerbated by Russia’s war in Ukraine.

The said the war had increased exchange rate volatility, which could have adverse implications for economic and financial stability, and pledged to “cooperate as appropriate” on currency issues in line with their commitments as part of the Group of Seven (G7) and Group of 20 economies.

Finance Minister Suzuki Concerned about Yen Weakness

Japanese Finance Minister Suzuki, who issued a fresh warning about the renewed Japanese Yen weakness earlier on Tuesday, said he told Yellen that the Japanese government is concerned about the Yen’s recent rapid weakening.

As G7 agrees, excess volatility and disorderly moves can hurt economic and financial stability, and we are carefully watching the market with high sense of urgency,” Suzuki told reports after the meeting.

Japan’s Producer Prices Rise

Japan’s producer price index (PPI) increased by 9.2% in June on a yearly basis, according to the Bank of Japan on Tuesday.

The figure marked a 0.1 percentage point increase compared to the yearly change seen in May. On the monthly basis, the PPI went up by 0.7%, only slightly above market expectations.

Short-Term Outlook

Investors are expecting the divergence between the Fed and BOJ to remain supportive. However, safe-haven buying due to falling demand for riskier assets could underpin the Japanese Yen, at least temporarily.

Furthermore, there is also the possibility of an intervention by the Japanese government or BOJ, after Japanese Finance Minister Suzuki meets with U.S. Treasury Secretary Janet Yellen. This could also put temporary pressure on the Dollar/Yen.