Has the market underestimated the rebound potential of the yen?

XM Forex APP News--Win the weak dollar against the yen during the European session on Friday (May 23), the price remained near the two-week low that it hit the previous day. Japan's higher-than-expected consumer inflation data reaffirmed the Bank of Japan's bet that it would continue to raise interest rates. This marks a huge disagreement compared to expectations that the Fed will further reduce borrowing costs in 2025, which puts the dollar longs on the defensive and benefits the lower-yield yen. Meanwhile, U.S.-Japan trade negotiations appear to be making progress as officials continue to meet regularly. In fact, Japan's highest tariff negotiator Ryoho Akazawa plans to visit the United States around May 30 to hold a new round of negotiations with the Trump administration. This increases hope for an early trade deal, which in turn provides an additional boost to the yen. The fundamental background shows that the path with the least resistance of the yen is still upward and supports the prospect of the yen continuing its downward trajectory in the last two weeks or so. Japan's inflation continues to warm up. Japan's core inflation indicators show no signs of cooling, strengthening market expectations that the Bank of Japan may soon raise interest rates again, despite the risks brought by rapid changes in U.S. trade policy. Data released by the Japan Bureau of Statistics on Friday showed that the national consumer price index (CPI) rose 3.6% year-on-year in April. Further details show that the national core CPI, excluding the price of volatile fresh foods, rose 3.5% year-on-year in April, compared with the previous data of 3.2%, and expected 3.4%. In addition, a metric that the Bank of Japan closely watched that excludes fresh food and energy prices rose slightly to 3% year-on-year from 2.9%. In addition, expectations that wages will push up prices should continue to bring continuous support to the Bank of Japan's central bank.The pressure to continue the interest rate hike. In fact, Bank of Japan officials recently said they are willing to raise interest rates further if the economy and prices improve as expected. By contrast, traders have stepped up bets on further rate cuts in the Federal Reserve after weakened last week's U.S. Consumer Price Index (CPI) and Producer Price Index (PPI). Next Friday, the market will receive inflation data from Tokyo for May, which will provide clues to national data released in late June. The Bank of Japan's interest rate hike expectations rekindle the market is paying attention to potential inflation trends. Interest rate swap data shows that the probability of raising interest rates by 25 basis points by the end of the year is 76%. This is a significant shift compared to the situation where the market believed that the likelihood of such a move was extremely low a month ago. After decades of fighting deflation, Japan's continued inflationary background, which is extremely rare in Japan, drives Japanese Treasury yields to rise sharply this year, especially long-term bonds. This also puts pressure on long-term bonds in other countries, as Japanese investors are attracted to turn to domestic investment rather than overseas, especially as interest rate spreads narrow sharply. Japan's rising yields curb interest-bearing trading? It is worth noting in the past week that the US dollar/JPY and Japan's 30-year Treasury bond yields were strongly negatively correlated with a correlation coefficient of -0.88. Historically, the USD/JPY is often closely related to U.S. Treasury yields, but this relationship has disappeared in recent months. On the contrary, changes in Japan's yields are becoming increasingly important, as the positive correlation between the 30-year interest rate spreads between the United States and Japan during the same period shows this. While the USD/JPY is also closely related to traditional drivers such as S&P 500 futures and VIX index and negatively correlated with safe-haven assets such as gold, this may reflect that investors in other asset classes are also paying close attention to long-term bond yields.

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