Why the Yen’s Bull Run is Stalling: Trade Wars and Central Bank Caution

The Japanese yen, long a beneficiary of its status as a global safe-haven currency, faces renewed headwinds in 2025. While optimists might see opportunities in the yen’s historical resilience, recent developments suggest the currency’s bull case is increasingly dismissed by market participants. Three key factors—trade tensions, central bank policy divergence, and technical pressures—are combining to weaken the yen’s prospects.

The BOJ’s Dovish Dilemma

At the heart of the yen’s struggles is the Bank of Japan’s (BOJ) reluctance to normalize monetary policy. Despite inflation nearing its 2% target, the BOJ held rates steady at 0.5% in May 2025 and slashed its 2025 GDP growth forecast to just 0.4–0.6%. This cautious stance reflects fears that U.S.-imposed tariffs on Japanese auto exports and other trade barriers could strangle the economy.

The central bank’s hesitation has kept interest rate differentials with the U.S. wide. While the Federal Reserve may cut rates as soon as June (per a 65% probability priced into the CME FedWatch Tool), the BOJ shows no sign of following suit. This divergence is a drag on the yen, as investors chase higher yields elsewhere.

Trade Wars and the Yen’s Downward Spiral

The U.S.-Japan trade negotiations, now entering a critical phase, are a wildcard for the yen. Persistent uncertainty over tariffs on Japanese automakers—such as Toyota and Honda—has already curbed business investment. Prime Minister Shigeru Ishiba’s emergency subsidies for energy costs are a stopgap, but they do little to address the structural threat to Japan’s export-driven growth model.

Analysts warn that if tariffs materialize, Japan’s GDP could contract further. The BOJ’s revised inflation forecast—lowered to 2.0–2.3% for 2025—reflects this risk. Even robust wage growth from firms like Fast Retailing (UNIQLO’s parent) is being offset by rising import costs, leaving households vulnerable.

Technical Indicators Signal More Pain Ahead

Market technicians highlight a bearish outlook for USD/JPY. The pair has tested support at 142.00, with a break below that level risking a slide toward 139.88—the year’s low. Meanwhile, the euro/yen cross faces downward pressure as the European Central Bank’s easing cycle contrasts with the BOJ’s stagnation. A potential “head-and-shoulders top” in EUR/JPY could drive the pair to 135.00, further squeezing the yen.

Can the Bull Case Survive?

For yen bulls, hope hinges on two scenarios: a resolution to trade tensions or an abrupt BOJ policy shift. However, both seem unlikely. U.S. tariffs appear entrenched, while the BOJ’s revised forecasts underscore its preference for caution. Even a U.S. recession—a risk as Fed rate cuts loom—could boost the yen’s safe-haven appeal. But with global risk aversion already elevated, such a move might not be enough to reverse the yen’s longer-term trajectory.

Conclusion: The Yen’s Weakness is Here to Stay

The yen’s bear case is firmly in the driver’s seat. With the BOJ’s growth and inflation forecasts revised downward, trade tensions unresolved, and global yields diverging, the yen faces sustained pressure. The USD/JPY pair risks testing 139.88, while EUR/JPY’s technicals suggest further declines. Unless Japan secures a trade deal or the BOJ surprises with hawkishness—both low-probability outcomes—the yen’s decline is likely to continue. Investors betting on a yen rebound may find themselves on the wrong side of this stubbornly bearish trend.

Data points to back this view:
- BOJ’s 2025 GDP forecast: 0.4–0.6% (down from 0.9–1.1% in January).
- Core CPI projection: 2.0–2.3%, below the 2.2–2.6% earlier estimate.
- USD/JPY yield spread: Widening as U.S. rates stabilize while Japan’s stay near zero.

In 2025, the yen’s story is one of caution, not conviction.