The Japanese Yen (JPY) experienced a moderate pullback on Friday, trading at 158.60 against the US Dollar (USD) after rebounding from session lows of 158.03. This movement followed the release of Japan’s Merchandise Trade Balance data, which showed the trade deficit widened to JPY 634.5 billion last month from JPY 409 billion in June, driven by a 27.8% increase in imports due to higher energy and semiconductor prices [1]. Despite a broad-based USD weakness triggered by the US Treasury’s plan to double buybacks of long-term government debt, the Yen’s gains were trimmed by the negative trade data and earlier weaker-than-expected Japanese GDP figures, casting doubt on the Bank of Japan’s ability to accelerate monetary tightening [1].
Portfolio flows further pressured the Yen, as foreign investors accelerated Japanese Government Bond (JGB) selling with net outflows of ¥1.25 trillion last week, reducing year-to-date foreign net purchases to ¥4.99 trillion—the lowest since early February. Meanwhile, Japanese investors increased overseas allocations, purchasing ¥1.14 trillion in foreign bonds and ¥1.39 trillion in foreign equities, marking the second-largest weekly equity purchase this year. This flow mix, characterized by foreign selling of Japanese bonds and stronger Japanese buying of foreign assets, weakens support for the JPY and leaves it vulnerable to further depreciation [2].
Japan’s July 2026 trade data showed a sharp improvement in external demand, with exports rising 23.2% year-on-year to a record July high, mainly driven by automobiles and semiconductor-related electronic parts. Exports to the US, EU, and Asia grew strongly, but trade with China remained in deficit at ¥775.4 billion, with both exports and imports expanding [2].
On the US side, the Treasury’s unscheduled expansion of long-end buybacks triggered the largest daily US Dollar drop since March outside intervention episodes. The buyback plan could more than double the total from the original maximum of USD 2 billion to at least USD 4 billion, focusing on 10-year and longer maturities [3]. Analysts at MUFG warn that this move underscores growing concern over US yield levels and could undermine confidence in US assets, leaving the Dollar more vulnerable to downside risks even if yields are contained. The upcoming Jackson Hole speech by Fed Chair Warsh is now seen as more important, with the prospect of subsiding inflation potentially easing credibility risks but also weighing on USD performance as markets may remove tightening currently priced in [3].
FX strategists at UOB note that the downward momentum for USD/JPY is starting to build, but is insufficient for a sustained decline, suggesting any decline should be contained within a 156.60/159.60 range [1].
CONCLUSION
The Japanese Yen remains under pressure due to a widening trade deficit, portfolio outflows, and weak GDP data, while the US Dollar faces downside risks following the Treasury’s expanded buyback plan. Market sentiment is negative for both currencies, with analysts highlighting vulnerability and limited upside. Investors are closely watching upcoming policy signals, particularly the Jackson Hole speech, for further direction.