USD/JPY forms a death cross: is the Japanese yen about to soar?

The USD/JPY exchange rate was in the spotlight last week as the Federal Reserve delivered its March interest rate decision and Japan published its March inflation data. It was trading at 150, a few pips above the year-to-date low of 146.58. So, what next for the Japanese yen?

Why the Japanese yen has soared

The USD/JPY exchange rate has retreated in the past few months because of the recent US dollar index sell-off and the ongoing divergence between the Federal Reserve and the Bank of Japan (BoJ).

The US dollar index, a top gauge that measures the greenback's performance against a basket of currencies, has slipped from $110 to $104 this year.

It has also eased after the BoJ and the Federal Reserve moved in the opposite direction in terms of interest rates.

The Fed has slashed interest rates three times since last year, moving them from 5.5% to 4.5%. Officials have hinted that they will deliver two more cuts this year even as stagflation risks remains in the US.

The BoJ, on the other hand, has, surprisingly, become the most hawkish central bank in the developed world this year. It has delivered three rate hikes since 2024 as the country’s inflation rose modestly.

Economists expect that the BoJ will deliver one or two more rate hikes this year now that inflation has remained elevated this year.

Data released last Friday showed that Japan’s inflation is still high. According to the statistics agency, Japan core inflation rose by 3% in February, higher than the median estimate of 2.9%. It was, nonetheless, a better figure than most analysts expected.

Japan’s inflation would have been better were it not for some subsidies introduced by the government that shaved about 0.33% in the general figure.

Analysts expect that inflation will remain above 2% for longer, triggering more interest rates hikes in the coming months.

Japanese yen as a safe haven currency

The USD/JPY exchange rate has also dropped this year because of its role as a safe haven currency.

The rush to safe havens has intensified after Donald Trump restarted his trade war this year. He has already implemented steel and aluminium tariffs that will have an impact on Japanese imports.

Most importantly, he has pledged to implement reciprocal tariffs on imported goods. An escalation of tariffs, especially on Japanese vehicles would have a big impact on the Japanese economy.

It is unclear how Trump will structure Japan’s tariffs since the country has low tariffs on US goods. For example, US vehicles pay no tax when entering Japan. However, the main issue is that Japan maintains a big trade surplus with the US, which Donald Trump views as problematic. The trade deficit in 2024 was over $68 billion.