Japanese yen hits 7-month high amid trade war fears

The Japanese yen appreciated against the dollar on Friday afternoon, causing the exchange rate to fall below 142. The yen reached its highest level in approximately seven months as the escalating US-China trade war triggered a sell-off of the dollar against other major currencies.

The yen gained nearly 3% against the dollar. Other Asian currencies also strengthened, with the Malaysian ringgit rising 0.72% against the dollar. The South Korean won and the Singapore dollar also appreciated. The euro strengthened against the dollar to levels not seen since February 2022.

Shoki Omori, a global desk strategist at Mizuho Securities, stated, “The yen has risen because there is clearly a risk-off mood in the markets, with Trump imposing larger-than-expected tariffs on China.”

Omori added that recent sell-offs in US Treasury bonds have led investors to move away from the dollar and towards safe-haven assets such as the yen, Swiss franc, and gold. Japan’s large economy, political stability, and liquid financial markets make its currency an attractive safe-haven asset.

US Treasury bonds are traditionally viewed as a low-risk, safe-haven investment. However, the intensifying trade war has increased uncertainty, prompting investors to exit these assets and move into cash.

In the latest escalation of the trade war, China raised its retaliatory tariff rate against the US to 125%. US President Donald Trump had already increased tariffs on China to 145%, even while halting “reciprocal” tariffs on exports from other countries.

The tit-for-tat tariffs caused US stocks to fall sharply on Thursday, while concerns about the economic consequences dampened investor sentiment.

Weakness in US Treasury bonds has played a role in the yen’s strengthening. On Friday morning, the 10-year US Treasury bond yields, a benchmark for long-term interest rates, rose to 4.46% after falling below 4% following Trump’s announcement of new tariffs on trade partners last week. Bond yields move inversely to prices.

The yen typically weakens when US bond yields rise and widen the gap with Japanese bond yields, but strong safe-haven flows have overridden the usual downward pressure on the yen.

Omori from Mizuho predicted that 10-year US Treasury bond yields would fall as the year progresses. Omori estimates that the Federal Reserve will cut interest rates at least two to three times, depending on the health of the US economy.

He stated that a downturn in the US economy would mean lower yields on 10-year Japanese government bonds. “Of course, we may experience shocks depending on what happens in the US, and we must not forget that the Japanese government may issue more bonds for fiscal policy,” he said.

The yen’s appreciation dragged down the share prices of Japanese exporters on Friday. Shares of Nissan Motor closed down 6%, while shares of Toyota Motor fell 5%. Technology stocks such as Furukawa Electric lost around 6% in value.