Policy Paralysis and Tariff Threats Undermine Yen Stability

Key Takeaways:

*Trump’s proposed stacked tariffs on Japanese imports raise trade war fears, but Yen gains remain capped by weak household spending and real wage declines.

*BoJ division deepens as policymakers weigh sub-neutral rates against deteriorating growth forecasts and political uncertainty.

*Despite safe-haven flows on geopolitical risk, the Yen struggles to rally meaningfully as Fed dovishness keeps USD/JPY in a tight range near 147.

Market Summary:

The Japanese Yen remains caught in a volatile tug-of-war between rising geopolitical uncertainty and persistent policy inertia from the Bank of Japan. Although headlines around new U.S. tariff threats briefly revived safe-haven demand, the broader macro picture continues to tilt bearish for the Yen amid sluggish domestic data and unresolved policy ambiguity.

Reports that the U.S. may impose an additional 15% tariff on Japanese imports including automobiles have raised fresh concerns over Japan’s export outlook. These tariff proposals contradict earlier assumptions of non-stacked levies and have sparked alarm in Tokyo, especially given the sector’s pivotal role in Japan’s recovery. Yet the Yen’s gains on these developments were fleeting, as markets reassessed the likelihood and scope of implementation.

On the monetary policy front, the BoJ remains deeply divided. Recent minutes and public commentary reveal a split between members pushing for rate normalization arguing that policy remains below neutral and those advocating for continued patience, citing subdued consumption and six consecutive months of falling real wages. The government’s recent downward revision to 2026 GDP forecasts (now at 0.7% vs. 1.2% prior) further complicates the outlook for policy tightening.

Despite modest wage growth (+2.5% YoY), household spending remains soft, falling 3% in June, raising doubts about the sustainability of domestic demand-led inflation. Until clearer wage trends emerge in Q3, the BoJ is expected to tread cautiously. At the same time, political headwinds including the LDP’s recent election setback add further uncertainty to Japan’s policy trajectory.

Going forward, the Yen’s direction will likely be dictated by the resolution of U.S. trade policy and the BoJ’s next move. Without a credible policy shift or escalation in geopolitical risk, the Yen may remain rangebound, pressured by weak fundamentals and overshadowed by more active central banks.

Technical Analysis 

EURJPY, H4: 

EUR/JPY is consolidating near 171.68 after rebounding sharply from the 170.75 support zone, where a bullish double bottom formation has emerged on the chart. The neckline of this reversal pattern sits just below 172.00, and price is now trading above the breakout zone, hinting at a potential continuation toward the 172.80 resistance area. The double bottom marked by two clear rejection wicks near the same level signals fading bearish momentum and a possible shift in market structure in favor of buyers.

Momentum indicators are turning increasingly supportive. The Relative Strength Index (RSI) has risen to 57, holding above its midline and signaling improving bullish pressure without entering overbought territory. Meanwhile, the MACD has completed a bullish crossover, with both the MACD line and signal line trending higher and the histogram remaining in positive territory, reinforcing the upward momentum.

Overall, the technical setup favors further upside, with the double bottom structure, improving momentum, and supportive price action aligning for a potential continuation. Traders may look for confirmation above the neckline or consider pullbacks toward support levels for bullish entries.

Resistance Levels: 172.80, 174.50

Support Levels: 170.75, 169.20