06:35 AM EDT, 07/07/2025 (MT Newswires) -- The yen (JPY) has underperformed despite more risk-off trading conditions overnight Sunday, resulting in USD/JPY rising back above the 145.00 level, sai MUFG.

Yen weakness reflects, in part, building concerns over the failure of Japan to reach a trade deal with the United States that could see higher tariffs remain in place for longer than expected, wrote the bank in a note to clients. Japan has been singled out for criticism by the Trump administration in recent weeks for the lack of progress in trade talks.

Japanese Prime Minister Shigeru Ishiba stated over the weekend that he won't "easily compromise" in talks with the U.S. as he seeks to avert President Donald Trump's threat to impose "reciprocal" tariffs of up to 35% on goods from Japan. President Trump has pressed Japan to accept more imports of U.S. autos and rice.

PM Ishiba noted that Japan was "preparing to deal with all kinds of situations." In a rush to secure a last-minute trade deal, Japan's chief trade negotiator Ryosei Akazawa has held two phone meetings since late last week with U.S. Commerce Secretary Howard Lutnick, with both sides agreeing to continue to coordinate.

The elevated level of trade policy uncertainty has been one reason why the Bank of Japan has become more cautious over tightening monetary policy further in the near term, stated MUFG. Failure to reach a trade deal to avoid the higher tariffs would add to their caution, further pushing back the timing of BoJ rate hike expectations beyond the end of this year.

At the same time, BoJ rate hike expectations have been dampened overnight Sunday by the release of weaker wage growth from Japan, pointed out the bank. The release of the latest labor cash earnings report for May revealed that wage growth slowed to 1.0% year over year, down from a revised increase of 2.0% in April.

The slowdown in headline cash earnings appears to reflect swings in special cash earnings and fewer working days, added MUFG. According to Bloomberg, special cash earnings dropped by 18.7% and the number of working days by 0.3 from the same month a year earlier.

In contrast, base salaries for full-time workers, which smooths out distortions from survey sample changes, slowed only modestly to 2.4% year over year from 2.5%.

The BoJ is unlikely to place too much emphasis on the slowdown in headline wage growth in the report, according to the bank. The drop in real wages of 2.9% year over year in May is also a headache for the government ahead of the Upper House election taking place in about two weeks. The government has pledged to provide cash handouts of 20,000 yen per adult along with additional incentives to spur wage growth.