Japanese Yen Weakens Ahead of BoJ Decision but Downside Remains Limited

The Japanese Yen (JPY) opened the week on a softer note, trading lower against the US Dollar in Monday’s Asian session. However, the downside for the Yen remains contained as investors turn cautious ahead of key central bank announcements, notably the Bank of Japan (BoJ) on Tuesday and the US Federal Reserve on Wednesday.

BoJ in Focus: Is Policy Normalization Coming?

While markets largely expect the BoJ to keep its benchmark rate steady at 0.5%, there is growing speculation the central bank may begin tapering its bond purchases—potentially cutting JGB buying in half starting April 2026. This policy move, combined with stronger-than-expected inflation trends, has led many to believe the BoJ remains on track to gradually tighten monetary policy.

Despite Monday’s weakness, this underlying hawkish shift may cushion further losses in the Yen and cap upside in the USD/JPY pair.

Geopolitical Tensions Support JPY as a Safe Haven

Rising geopolitical risks, particularly the Israel-Iran conflict, have fueled demand for safe-haven assets like the Japanese Yen. Israel launched strikes on Iranian nuclear and military sites last week, prompting retaliatory drone attacks from Iran. The risk of further escalation could reinforce JPY buying in the short term.

USD Outlook: Fed Rate Path and Market Sentiment

The US Dollar remains near recent lows, pressured by expectations that the Fed will maintain rates at the June meeting and potentially begin easing in 2025. Friday’s University of Michigan Consumer Sentiment Index surprised to the upside, hitting 60.5 vs. 53.5 expected, which provided a brief lift to the USD. Still, dovish Fed expectations continue to weigh on broader Dollar sentiment.

Technical Outlook: Key Levels for USD/JPY

USD/JPY is trading in a narrow multi-week range, with upside capped near 144.75. A clear breakout above the psychological 145.00 level could open the door toward 145.45 and possibly the 146.25-146.30 May highs.

Support sits near 144.00, followed by 143.50 and then 142.75. A break below these zones could accelerate bearish momentum and mark a reversal from the pair’s recent recovery.

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Conclusion:
While the Japanese Yen remains subdued, traders are holding back from aggressive moves ahead of this week’s central bank updates. A hawkish BoJ or escalating geopolitical risk could strengthen the Yen, especially if the Fed maintains a dovish tone. For now, USD/JPY remains in a consolidation phase, awaiting clear catalysts to define its next trend.

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