The 25% US import duty on cars is a significant headwind for Japan. Should it find common ground with the US, the USDJPY pair will likely continue to decline. Let’s discuss this topic and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- July is a seasonally strong month for the yen.
- The derivatives market expects the BoJ to raise its overnight rate in 2025.
- Trade negotiations between Washington and Tokyo are progressing slowly.
- Short trades on the USDJPY pair can be opened with targets at 130 and 125.
Fundamental Forecast for Yen for Six Months
What happened once may never happen again, but what happens twice will likely happen a third time. Over the past five years, the yen has strengthened against the US dollar five times in July due to the divergence in monetary policy between the Fed and the Bank of Japan, as well as expectations of a trade deal between Washington and Tokyo. These factors have contributed to a bearish outlook for the USDJPY pair.
Yen’s Seasonal Performance
Source: Bloomberg.
Historically, the yen’s seasonal strength in mid-summer has been attributed to several factors. These include position adjustments ahead of the August summer holidays, the conversion of foreign income by Japanese exporters to pay dividends, and the Bank of Japan’s monetary policy. The current weakness of the US dollar is favoring USDJPY bears. The USD index experienced its worst half-year performance since 1973.
Speculators are increasing their long positions on the Japanese currency, anticipating divergence in monetary policy and progress in trade negotiations. The derivatives market indicates a 40% probability of an overnight rate hike by the Bank of Japan in October and a probability of more than 50% that this will occur before the end of the year. In contrast, the derivatives market anticipates nearly three acts of monetary expansion from the Fed.
If Washington and Tokyo fail to find common ground, the situation could deteriorate significantly. Japan has a trade surplus with the US of ¥8.6 trillion, equivalent to $59.3 billion. It is estimated that 82% of the discrepancy is attributable to car exports. Japan’s demand for the US administration to eliminate the 25% tariffs stems from this ongoing trade imbalance. Japan is on the verge of entering a technical recession, with a contraction in GDP in the first quarter and tariffs set to take effect in the second quarter.
US Trade Deficit With Major Partners
Source: Bloomberg.
The negotiation process is proceeding slowly. Expressing concern over the perceived lack of progress, Donald Trump noted that millions of Japanese cars are being imported into the US, while American cars are not popular in Japan, and this was not fair. Tokyo has the option of increasing its purchases of rice and oil from the United States, but it has not done so. The US administration plans to send a letter to Asia outlining new tariffs.
Markets are optimistic by nature, believing that Washington and Tokyo will eventually reach an agreement, Japan’s economy will not slide into a technical recession, and the Bank of Japan will increase its overnight rate in 2025. Should this scenario come true, the USDJPY pair is likely to resume its downward trend.
Along with the expiration of the 90-day delay in tariffs, the release of US employment data for June will put the pair particularly under pressure. Strong data could bolster the US dollar. Conversely, a cooling labor market will trigger a sell-off in the US dollar.
USDJPY Trading Plan for Six Months
In the medium and long term, investors should continue to focus on opening short positions on the USDJPY pair on upward pullbacks. The previously announced targets of 130 and 125 remain relevant.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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