Yen Strength Back in Focus

Japan's ruling party is signaling a strategic pivot, not by threatening U.S. bond markets, but by calling for a stronger yen through long-term economic reform. As global volatility intensifies under Trump’s trade pressure, Tokyo is taking a careful approach: maintain trust with the U.S., while addressing the currency weakness that’s been hammering households at home.

This comes as trade tensions flare once again, and speculation swirls over how far Japan might go to protect its economic interests, or whether it will use its massive U.S. Treasury holdings as leverage. Spoiler: it won’t.

Yen Weakness Has Gone Too Far, Say Japanese Lawmakers

Over the weekend, Itsunori Onodera, policy chief of Japan’s ruling Liberal Democratic Party, spoke publicly on NHK about the need to strengthen the yen. But unlike past episodes of currency concern, this isn’t about boosting exports, it’s about protecting households from inflation.

“The weak yen has been among factors pushing up prices,” said Onodera. “To strengthen the yen, it’s important to strengthen Japanese companies.”

That’s a notable shift in tone. For decades, Tokyo has quietly leaned into a weaker yen to support its export-driven industries. But this time, the balance of cost vs. benefit may be tipping. With import prices surging and real wages under pressure, the yen’s depreciation is becoming a political liability.

No Appetite for a Treasury Dump

In the same interview, Onodera shut down a controversial proposal from Japan’s opposition, that Tokyo should threaten to sell off U.S. Treasury holdings as a bargaining chip in trade talks. Japan currently holds $1.079 trillion in Treasuries, more than any other foreign country.

“As a U.S. ally, the government shouldn’t think about intentionally using U.S. Treasury holdings,” Onodera said.

That reassurance comes at a delicate time. The U.S. bond market is already reeling from the aftermath of Trump's escalating tariff campaign, and recent mass selling in Asia , potentially involving China, has shaken investor confidence.

A coordinated sell-off by Japan would only add fuel to the fire, possibly triggering a broader dollar rout and destabilizing global fixed income markets.

Trade Talks and Currency Questions

This week, Japan's top trade negotiator Ryosei Akazawa will meet U.S. Treasury Secretary Scott Bessent, with currency policy likely to be a hot topic. According to sources close to the talks, Washington may pressure Tokyo to help prop up the yen, ironically flipping the usual narrative where the U.S. accuses Japan of currency suppression.

The issue? While the Fed has raised rates aggressively in response to sticky U.S. inflation, the Bank of Japan has only just begun lifting its ultra-loose policies. That divergence helped drive the yen to nearly 160 per dollar last year, a level that forced Tokyo to intervene.

Since then, the yen has staged a modest comeback, with USD/JPY falling to as low as 142.89 last week amid broad-based dollar weakness and market turbulence following Trump’s tariff rollout.

Why the Yen Rebound Matters Now

Here’s the twist: while Japan often frets over a strong yen hurting exporters, officials are now equally concerned about the risks of prolonged weakness. Energy imports, food costs, and overseas services have all become more expensive in yen terms, and the pain is trickling down to households.

With spring wage negotiations delivering record-high pay hikes, the pressure is on the BoJ to validate those gains with more policy normalization. Inflation-adjusted real wages remain negative, but nominal wages rose 3.1% in February, a clear sign that domestic price and pay dynamics are shifting.

This raises a crucial question for markets: Is the BoJ finally preparing to tighten faster, and will the yen regain its footing for good?

Treasury Chaos Forces Trump to Rethink

Trump’s tariff barrage over the past two weeks has created massive ripple effects — not just in trade corridors but in financial markets. Global assets, from stocks to bonds to commodities, have been whipsawed in what analysts are calling the most volatile stretch since the 2020 pandemic crash.

One of the biggest shockwaves came from the U.S. Treasury market. A huge wave of selling, especially during Asian hours, has stoked speculation that China, which holds $760.8 billion in Treasuries, may have been behind the move. The sell-off was so severe that it reportedly played a key role in Trump’s decision to pause his 90-day “reciprocal tariff” rollout.

Despite the pause, tensions remain high. The 104% tariff on Chinese goods is still active, and Washington has left the door open for more duties, including the possibility of targeting pharmaceutical imports.

BoJ and the Fed: Still Worlds Apart

While the Fed is now facing renewed calls to cut rates amid slowing growth, the BoJ is quietly under pressure to exit its decade-long monetary experiment. That divergence, if narrowed, could significantly reshape USD/JPY dynamics going forward.

Currently, traders are watching whether the BoJ will lift rates again later this quarter, especially if CPI remains elevated and wage data continues to surprise to the upside. A faster pace of normalization could remove a key driver of yen weakness and reintroduce Japan as a force in FX markets after years of dormancy.

Meanwhile, the Fed’s pivot is gaining momentum. Despite strong labor data, core inflation remains sticky, and forward-looking indicators point to softness. If the FOMC minutes this week hint at rate cut consensus, it may reinforce the yen’s safe-haven bid.

Yen Outlook: Still Room to Run?

The yen’s strength isn’t just a sentiment shift, it’s showing up clearly on the charts. USD/JPY has broken decisively below the descending trendline and is now trading near 142.40. The move confirms a continuation of the downtrend, with price currently sitting just above a key support zone around 140.25, the same area that caught two major bounces in December 2023 and September 2024.

If this zone fails to hold, there’s not much in the way of support until around 137.65. On the upside, any recovery attempt would need to reclaim 146.88 to shift sentiment meaningfully. Until then, rallies may just offer better entries for those playing the yen strength narrative.

With risk-off flows still dominant and Japan stepping up verbal intervention, the yen has both macro and technical tailwinds. But keep an eye on U.S. data and BoJ-Fed divergence headlines, volatility around JPY isn’t going anywhere.

Final Thoughts: Strength Over Leverage

Japan’s position is clear: it doesn’t want to fight trade wars with financial weapons. Despite holding the largest U.S. Treasury stockpile, Tokyo has no interest in threatening global markets.

Instead, policymakers are focused on rebuilding long-term competitiveness, lifting wages, and stabilizing the yen through fundamentals, not intervention. That’s a much slower path than retaliatory selling, but potentially a more sustainable one.

In a world where FX volatility is back and safe-havens are in demand, the yen is reclaiming its reputation. And with Japan’s economy gradually shifting out of deflation-era thinking, this time, the rally might have staying power.