FX Outlook on USD/JPY Trading Pair

USD/JPY has been on the rise since the start of 2022. It broke several records and is looking to continue its bullish form.

There are many factors behind the rise of the USD against JPY.

In this guide, we are going to discuss the USD/JPY trend for 2022, how long the trend will continue and what you need to know as a trader.

It’s going to be a long tale, so buckle up!

The rise of USD/JPY in 2022

USD/JPY has been on the rise since the start of the year. At the start of the year, the pair was trading at 114, but at the time of writing, it had gone to 126.

On March 28, the yen plummeted 2.5 percent to 125.09 per dollar, its lowest level since August 2015. On April 15, the dollar was 0.43 percent higher at 126.40 yen, having reached above 126 for the first time since May 2002.

As you can see on the chart below, the USD/JPY has constantly been surging since the start of the year.

Chart — The rising of USD/JPY
The rise of USD/JPY

Factors affecting USD/JPY rise

So, what’s the reason behind this surge? There are many factors behind this:

Hawkish Fed

Since the beginning of the year, the Fed has started raising interest rates early in order to combat increasing inflation.

As inflation and the Russia-Ukraine war hinder economic development, the US Central Bank plans to tighten monetary policy with a quarter-point interest rate rise, ending a period of emergency financial stimulus and hiking rates for the first time since 2018.

The Fed suggested in March that it wants up to six more rate hikes this year and would begin lowering the size of its balance sheet as early as May.

On April 18, St. Louis Fed President James Bullard stated that inflation is “far too high for comfort” and that Fed policymakers aim to reach neutral rates as soon as possible.

The central bank’s tone will be hawkish, implying that it plans to keep raising interest rates to tackle excessive inflation. This hawkish tone from the Fed is underpinning the JPY.

Dovish BoJ

The promise of BOJ Governor Haruhiko Kuroda to maintain stimulus has widened the disparity between the US and Japanese benchmark rates to its biggest since 2019.

As a result, the yen has fallen more than 12% versus the dollar this year, by far the most among its major counterparts.

In the midst of the Japanese yen’s persistent decline, the country’s Chief Cabinet Secretary, Hirokazu Matsuno, stated that they are actively monitoring FX movements and their possible impact on the economy.

Japanese officials continue to intervene verbally, but it has little to no effect on the USD/JPY pair, which appears to be out of control for the time being.

Mr. Yen, a currency diplomat, stated that “Japan should interfere in the currency market or boost interest rates to preserve the yen if it falls below 130.”

The Bank of Japan has intervened to keep the yield on Japanese 10-year government bonds below 0.25 percent and has repeatedly stated that it will maintain its ultra-loose monetary policy.

The yield on the benchmark 10-year US government bond, on the other hand, has risen to its highest level since December 2018 amid expectations that the Fed would tighten monetary policy more quickly.

Analysts believe the growing interest-rate disparity will further sink the currency.

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Safe-haven USD

The USD Index, which measures the strength of the US currency against a basket of other major currencies, reached a two-year high in April 2022, breaking beyond the 100-point barrier for the first time since early 2020. The rise was fueled by traders flocking to the safe-haven dollar in record numbers.

DXY chart
U.S. Dollar Index

Moreover, as the situation between Ukraine and Russia intensifies, many investors flock to the good ol’ greenback during uncertain times. That’s why the currency is so strong against JPY this year.

High oil prices

Because Japan is a net importer of oil, the yen has shed some of its shine as a safe haven and has been unable to capitalize on spells of risk aversion caused by the Ukraine conflict. This has worsened its dismal performance, particularly versus commodity-producing countries’ currencies.

How long will the trend continue?

Indeed, markets have priced in several 50 basis point rate rises by the Fed in response to concerns that the escalating Ukraine conflict will put additional pressure on already high inflation. This continued to bolster the US dollar, giving an extra lift to the USD/JPY pair and supporting the existing favorable trend.

Expectations for a more forceful Fed reaction to battle stubbornly high inflation, as well as a lengthy Russia-Ukraine confrontation, will continue to weigh on investor mood.

What to expect from USD/JPY in 2022?

The Fed’s hawkish move ensures that US bonds cannot be utilized as a safe haven throughout the current Russian-Ukrainian crisis, making a large decline in rates improbable.

Higher rates indicate that the US dollar, rather than the yen, is the safe haven of choice for hedging geopolitical risk. This, together with the Japanese economy’s sensitivity to rising energy prices, suggests that the prospect of a sustained decrease in USD/JPY isn’t promising.

What traders can do during the whole situation?

As a trader, it’s important to come up with a trading plan before taking positions. If you are looking to trade USD/JPY, then look for long-term opportunities. The pair is and will continue to provide bullish movements in 2022.

So, it’s important to do market research and look for the indicators like Fed Reserve May meeting, BoJ’s dovish stance, the Russian-Ukrainian war, and the greenback’s overall strength.

The pair can retrace a bit along the way, but the overall trend remains in favor of the bulls.

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