Japanese Yen Gains Amid Trade-War Fears and Weak US Dollar, Pressuring USD/JPY
By Haresh Menghani | FXStreet | February 23, 2026
The Japanese yen extended its intraday gains on Monday, driven by renewed fears surrounding global trade tensions and the broad weakness of the US dollar. These factors combined to press the USD/JPY currency pair lower, signaling a cautious start to the week for investors.
USD/JPY Falls on Risk Aversion and Fed Rate Uncertainty
The USD/JPY pair opened Monday’s Asian trading session on a softer footing, slipping to around 154.35 from previous levels near 154.90. The pair is down more than 0.45% for the day and remains vulnerable to further declines as market sentiment tilts toward risk aversion.
The impetus behind the yen’s safe-haven demand traces back to US President Donald Trump’s recent announcement of a 15% global levy following a US Supreme Court ruling that struck down his previous broad tariff measures. This move has reinvigorated fears of a prolonged trade war, raising concerns about economic disruption through potential retaliations and supply chain disturbances worldwide.
As a result, investors have sought refuge in traditional safe havens, driving yen demand amid a broader retreat from riskier assets. The accompanying weakness in the US dollar has also contributed to downward pressure on the USD/JPY, with traders factoring in shifting Federal Reserve (Fed) policy expectations.
Fed Rate Cut Expectations Weigh on the US Dollar
Data released last Friday revealed a stronger-than-expected rise in the US Personal Consumption Expenditures (PCE) Price Index in December, which supported bets that the Fed would maintain current interest rates in its upcoming March meeting. However, subdued US GDP growth—reporting a slowdown to a 1.4% annualized pace in the fourth quarter—has rekindled speculation of two potential 25 basis point rate cuts later in 2026. This renewed expectation of monetary easing has further undermined the US dollar’s strength, pulling it away from the nearly one-month high reached last Friday. The diminished greenback adds downward momentum to USD/JPY amid the yen’s growing appeal as a safe harbor.
Japanese Economic Challenges Limit Yen’s Upside
Despite the yen’s gains, Japan’s underlying economic conditions and monetary policy outlook limit how far the yen can appreciate against the dollar. Recent data underscored Japan’s fourth-quarter GDP growth slowing and inflation hitting its lowest level in two years, dampening hopes for an imminent policy tightening from the Bank of Japan (BoJ).
Prime Minister Sanae Takaichi faces mounting pressure to introduce new fiscal stimulus measures to support the economy, further complicating the BoJ’s policy decisions. The central bank’s delay in raising interest rates has tempered yen strength, keeping USD/JPY losses in check amid light trading volumes owing to a bank holiday in Japan.
Understanding Market Sentiment Dynamics: “Risk-On” Vs. “Risk-Off”
Market participants widely rely on the themes of “risk-on” and “risk-off” sentiment to gauge their investment appetite. In a “risk-off” environment—such as the one prevailing now—investors prioritize safety by favoring assets like the Japanese yen, US dollar, Swiss franc, government bonds, and gold. Conversely, “risk-on” phases encourage buying of stocks, commodities, and currencies linked to commodity exporters such as the Australian and Canadian dollars.
Currently, elevated geopolitical tensions and trade concerns have shifted the mood decisively toward risk aversion, supporting the yen’s role as a safe-haven currency.
Related Market Updates:
- EUR/USD rallied above 1.1800, buoyed by renewed “Sell America” sentiment amid tariff uncertainty.
- GBP/USD moved higher toward 1.3550 on broad US dollar weakness.
- Gold prices remained elevated near monthly peaks, underpinned by safe-haven demand.
As the week progresses, investors will closely watch US economic data releases and any further developments in global trade policy to gauge the sustainability of current trends impacting USD/JPY and broader currency markets.
Haresh Menghani is a financial markets analyst with over a decade of experience in forex and global macroeconomic trends.
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