Since the beginning of the year, the Japanese yen has appreciated 3.5% against the U.S. dollar. The dollar’s weakening following Donald Trump’s inauguration has become somewhat of a seasonal effect. However, USDJPY may enter a period of stagnation as the exchange rate is pulled in opposite directions by U.S. tariff rhetoric and Japan’s economic situation.
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BoJ’s Not Behind
After a brief period of uncertain rhetoric, the Bank of Japan (BoJ) has returned to a clearly hawkish stance due to mounting wage-driven inflationary pressures. Japanese wages rebounded sharply at the end of 2024, and the upcoming spring wage negotiations are expected to result in record-high increases.
Money markets anticipate another BoJ rate hike in September. Source: Bloomberg Finance L.P.
GDP exceeds expectations
Japan’s GDP has long struggled due to weak consumption and a shrinking workforce (aging population). However, the latest Q4 2024 data offers hope for a recovery. Annualized GDP rose unexpectedly to 2.8% (forecast: 1.1%, previous: 1.7%), while quarterly growth reached 0.7% (forecast: 0.3%, previous: 0.4%). Business capital expenditures were the primary driver of this growth, with companies significantly increasing investments. Private consumption also surprised, rising by 0.1% despite expectations of a 0.3% decline, signaling early signs of relief after record-high inflation.
Source: XTB Research
Tariff Concerns
Japan’s improved trade balance (higher net exports) also contributed to GDP growth. However, this success could be quickly erased as concerns grow over potential U.S. tariffs on Japan. Until recently, Japan was not a target of Donald Trump’s protectionist policies. However, during a recent meeting with Japan’s Prime Minister, Trump stated that “Japan risks tariffs if it does not buy enough American goods.” While no immediate action has been taken, the mere mention of tariffs was enough to halt the downward momentum of USDJPY.
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