Why USD/JPY is on a Short-Term Bearish Trend

The USD/JPY currency pair has recently exhibited a short-term bearish trend, with the exchange rate sliding to 146.88 from 147.84 at Tuesday’s Tokyo stock market close. This downward movement is driven by a confluence of factors, including the recent U.S.-Japan trade deal, evolving expectations around Bank of Japan (BOJ) monetary policy, yen dynamics influenced by Japan’s massive investment in the U.S., and broader market sentiment shaped by political and economic developments. This article explores these drivers and their implications for the USD/JPY pair’s short-term trajectory.

U.S.-Japan Trade Deal and Its Implications

On July 22, 2025, President Donald Trump announced a “massive” trade deal with Japan, imposing a 15% tariff on Japanese exports to the U.S., a reduction from the previously threatened 25% tariff, including on automobiles, which constitute over a quarter of Japan’s exports to the U.S. This deal also includes Japan’s commitment to invest $550 billion in the U.S. and increase imports of American cars, trucks, rice, and other agricultural products. The agreement has alleviated fears of heightened trade tensions, which had previously weighed on Japan’s economy and contributed to yen depreciation.

The trade deal’s resolution of tariff uncertainty has bolstered Japanese equities, with Nikkei futures rising 0.9% to 40,100 on the SGX, reflecting improved investor confidence. However, the USD/JPY pair has faced downward pressure. The reduction in tariffs from 25% to 15% mitigates the economic hit to Japanese exporters, particularly automakers like Toyota, Honda, and Nissan, which saw their shares surge by 8-14% in trading following the announcement. This positive equity market response suggests a stronger economic outlook for Japan, which typically supports the yen, contributing to the bearish pressure on USD/JPY.

Moreover, the trade deal removes a significant downside risk to Japan’s economy, as noted by Marcel Thieliant of Capital Economics. This development strengthens the case for the BOJ to resume its monetary tightening cycle, potentially as early as October 2025. A more hawkish BOJ stance could further support the yen, as higher interest rates increase the currency’s attractiveness to investors, exerting additional downward pressure on USD/JPY.

Bank of Japan’s Monetary Policy Outlook

The BOJ’s monetary policy is a critical factor in the USD/JPY’s short-term bearish trend. The central bank has maintained its policy rate at 0.5% since its last hike in July 2024, when it raised rates to a 15-year high of 0.25% from 0-0.1%. Despite recent economic uncertainties driven by U.S. tariffs, the BOJ has signaled its intent to continue normalizing monetary policy if economic and price forecasts align with its 2% inflation target.

The trade deal’s positive outcome has increased expectations for a BOJ rate hike, with the overnight index swap market pricing in a 75% chance of an increase before the end of 2025. Citi Research’s Tomohisa Fujiki suggests that the deal could pave the way for an earlier-than-expected rate hike, potentially prompting a hawkish tone at the BOJ’s upcoming meeting. A hawkish shift would narrow the interest rate differential between Japan and the U.S., where the Federal Reserve is expected to maintain steady rates, reducing the appeal of holding USD against JPY.

The BOJ’s cautious approach, as articulated by Governor Kazuo Ueda, reflects the need to assess the trade deal’s economic impact fully. However, the central bank’s focus on achieving a “virtuous cycle” of rising wages and inflation, supported by Japan’s tight labor market, suggests that rate hikes remain on the horizon. This expectation is reinforced by Japan’s core consumer inflation staying above the BOJ’s 2% target for 36 consecutive months, providing room for further tightening. A stronger yen, driven by anticipated rate hikes, contributes to the bearish outlook for USD/JPY.

Yen Dynamics and Japan’s U.S. Investment

Japan’s commitment to invest $550 billion in the U.S. as part of the trade deal is a double-edged sword for the yen. On one hand, such significant capital outflows could pressure the yen downward, as Japanese investors convert yen to dollars to fund these investments. However, the trade deal’s positive impact on Japan’s economic outlook and the reduced tariff burden outweigh this effect in the short term. The yen has strengthened recently, trading at 146.96 per dollar, down 0.2% following the trade deal announcement, reflecting market optimism about Japan’s economic stability.

The yen’s historical weakness, driven by the BOJ’s ultra-loose monetary policy from 2013 to 2024 and Japan’s reliance on imported fuel and raw materials, has been a key factor in USD/JPY’s upward trend in recent years. However, the BOJ’s shift toward normalization, coupled with the trade deal’s resolution of tariff risks, has shifted market dynamics. The yen’s 5.86% appreciation against the dollar over the past 12 months, despite a 0.32% weakening in the last month, underscores its potential for further gains, particularly if BOJ rate hikes materialize.

Japanese Government Bond Yields and Market Sentiment

Rising Japanese government bond (JGB) yields also support the yen’s strength and the bearish USD/JPY trend. The five-year JGB yield has climbed 9 basis points to 1.110%, and the ten-year yield has risen 8.5 basis points to 1.585%, reflecting expectations of tighter BOJ policy and potential fiscal expansion following Japan’s Upper House elections. Higher yields attract foreign capital to Japanese bonds, increasing demand for the yen and exerting downward pressure on USD/JPY.

Market sentiment has also been influenced by political developments in Japan. Prime Minister Shigeru Ishiba’s reported intention to resign by August 2025, following the Liberal Democratic Party’s (LDP) loss of control in both houses of parliament, introduces uncertainty. However, markets have largely shrugged off this news, focusing instead on the trade deal’s economic benefits. The Nikkei 225’s modest 0.9% rise in futures suggests that investors are prioritizing economic stability over political volatility, further supporting the yen.

Technical Analysis and Market Positioning

From a technical perspective, USD/JPY has broken key support levels, reinforcing its bearish trend. The pair breached uptrend support and horizontal support at 147.00 before the trade deal announcement, with subsequent attempts to recover above this level rejected. The next support levels at 146.00 and 144.40 are in focus, with the 50-day moving average at 145.16 providing additional downside guidance. Momentum indicators, such as the RSI (14) trending lower just above 50 and the MACD crossing below the signal line, suggest waning bullish momentum, aligning with the bearish outlook.

Investors’ positioning in forward steepeners, particularly in the 5y-10y JGB sector, reflects expectations of rising yields and a steeper yield curve, driven by potential BOJ rate hikes and fiscal policy pressures. This positioning further supports the yen’s strength, as higher yields enhance the currency’s appeal in carry trade dynamics.

Broader Global Context

The global context also plays a role in USD/JPY’s bearish trend. While U.S. Treasury yields have risen, with the 10-year note above 4.45%, the Federal Reserve’s expected pause on rate cuts limits the dollar’s upside against the yen. Additionally, global trade tensions, including Trump’s tariffs on other economies like China and the EU, have not significantly disrupted Japan’s trade deal optimism, allowing the yen to benefit from improved risk sentiment.

The short-term bearish trend in USD/JPY is driven by the U.S.-Japan trade deal’s resolution of tariff uncertainties, strengthening the Japanese economy and boosting expectations for BOJ rate hikes. The yen’s appreciation, supported by rising JGB yields and positive equity market responses, outweighs potential downward pressure from Japan’s $550 billion U.S. investment. Technical indicators and market positioning further confirm this bearish outlook. As the BOJ assesses the trade deal’s impact and prepares for potential tightening, USD/JPY is likely to face continued downward pressure in the near term, with key support levels at 146.00 and 144.40 in sight.