USD/JPY commenced 2025 at approximately 157.00, experienced a brief decline below 140.00 in April, and subsequently spent the remainder of the year steadily increasing, concluding December near 156.00, which is roughly 1% lower than its starting point. The trajectory was far from smooth: an April downturn influenced by tariffs and disappointing US data, a significant recovery in May, and ongoing challenges within the 155.00–160.00 range, which now serves as the central focus for 2026. The significant decline in USD/JPY during April was mainly influenced by factors related to the dollar. Tariff uncertainty and the “Liberation Day” reciprocal measures introduced headline risk into global markets, resulting in typical risk-off flows. Simultaneously, US macroeconomic indicators fell short of expectations: the initial Q1 real annualized GDP was reported at minus 0.3%, subsequently revised to minus 0.5%, indicating that growth was stagnating just as markets had anticipated a relatively smooth soft landing. The combination led to a decline in US yields and the dollar, with USD/JPY experiencing a brief drop of over 17 points from the 157.00 region to below 140.00. This prompted Japanese officials to issue verbal warnings against speculative actions, transforming the pair into a high-beta volatility instrument for macro funds.
By year-end, the Federal Reserve had reduced the funds rate to a range of 3.50%–3.75%, yet it declined to pledge to a bold easing trajectory for 2026. Official projections indicate approximately one cut in 2026, whereas markets continue to explore possibilities of two to three cuts, contingent upon inflation, tariffs, and growth data. Powell has probably executed his last cut before transitioning into a lame duck status, with an anticipated replacement in 2026, which introduces uncertainty regarding future reaction functions. The combination of moderate cuts, lingering inflation concerns, and political uncertainty regarding Fed independence has averted a fundamental decline of the dollar. This has resulted in a dynamic USD/JPY market, characterized by dollar declines during growth apprehensions, quickly followed by significant recoveries when US economic data or tariff news realign market expectations. On the yen side, the key development was the Bank of Japan’s decision to raise the policy rate to 0.75% in December, marking the highest level in approximately thirty years. In January, it transitioned from near-zero to 0.50% and revised its inflation outlook, which initially bolstered the yen. However, the rate of change following that point was more significant than the actual level itself. The BOJ took several months before the December decision, resulting in a performance that fell short of the earlier expectations for a quicker normalization process.
Core inflation is currently around 3%, while the neutral rate is estimated to be between 1.00% and 1.25%. This results in a policy rate of 0.75% that remains negative in real terms, prompting investors to wonder if one or two more hikes will indeed occur. The credibility gap serves as a significant factor that may lead USD/JPY to approach the 156.00–160.00 range, despite the implementation of a “historic” tightening measure. The current fiscal policy is acting as an additional structural impediment to the yen. Following the leadership transition in October, the new Japanese administration intensified its focus on fiscal expansion, advocating for a stimulus package valued at approximately 137 billion dollars and a supplementary budget close to 117 billion dollars to alleviate cost-of-living challenges. Currently, government debt is approximately 203% of GDP, ranking among the highest ratios in the developed world. The bond market reacted as the 10-year JGB yield reached an 18-year high, indicating increased term premia and long-term debt apprehensions. The current mix for FX presents significant challenges: increasing supply, elevated required yields, and concerns regarding fiscal sustainability hinder long-term yen purchases, even as policy rates show slight increases. This dynamic contributes to maintaining a high USD/JPY, despite the Bank of Japan’s tightening measures.
Despite the 2024 direct intervention line at 161.95 remaining untested, market participants continue to regard 160.00 in USD/JPY as a significant psychological threshold. Officials maintain their emphasis on volatility instead of a specific level; however, traders recognize that a decisive move and sustained rise above 160.00 would significantly increase the likelihood of both verbal and tangible intervention. The prevailing expectation alters positioning: macro funds are at ease with carry and trend strategies up to the mid-150s, yet they exhibit much greater reluctance to maintain structural longs beyond 160.00, where headline risk and the likelihood of official intervention increase. This illustrates the reason the pair can experience significant fluctuations within the 140.00–160.00 range while consistently struggling to achieve a clear multi-month breakout beyond this level. The 2025 EUR/JPY trend serves as an important alert for those considering USD/JPY as a clear short opportunity. At the beginning of the year, both macroeconomic indicators and technical analysis appeared to support a bearish crossover: a struggling eurozone with a probable ECB rate-cutting cycle, Japan anticipated to normalize interest rates, a developing shooting star pattern on the yearly chart, and a head-and-shoulders formation on the monthly chart. EUR/JPY has increased approximately 13.3% year-to-date and is about 20% above its February low, currently trading around 2% below its 1990 high, marking a sixth consecutive year of gains. The Bank of Japan’s partial normalization, coupled with a less-dovish stance from the European Central Bank and the reduction of safe-haven demand following tariff reversals, proved sufficient to surpass a classic bearish configuration. The same asymmetry is evident in USD/JPY: macro logic alone does not suffice; the trajectory is influenced by policy delivery, risk sentiment, and positioning dynamics. The behavior of silver in 2025 serves as a valuable analogy for momentum risk in foreign exchange markets. XAG/USD experienced a significant rally of over 120% into late December, surpassing multi-year resistance and its previous record high.
The monthly RSI surged past 70, indicating an overbought condition that has persisted for five consecutive months, reaching its highest level since 2011. A significant number of traders anticipated a conventional mean-reversion pullback, but that opportunity did not materialize. The majority of the movement took place with the RSI positioned above 70, and it was only when momentum dipped back below that threshold that the risk of exhaustion became significant. In the case of USD/JPY, which has experienced prolonged periods of weekly momentum while steadily increasing, the interpretation is clear: sustained momentum and valuation around 156.00–160.00 do not inherently limit the upward movement. The actual turning point occurs when both trend and momentum break down, leading to a rapid and chaotic unwinding process. The 2026 institutional outlook for asset classes delineates the risk landscape concerning USD/JPY. Gold is anticipated in various base scenarios to range between 4,500 and 5,000 dollars per ounce following an approximate 60% increase in 2025. Bitcoin forecasts are centered around 150,000 dollars for 2026, with certain extended trajectories aiming for 200,000 dollars by 2027. Major financial institutions anticipate the Nasdaq 100 could surpass 27,000 points, suggesting a further increase in equity strength driven by AI. The targets for EUR/USD are focused within the range of 1.20 to 1.22, with certain trajectories reaching up to 1.23 before a possible decline towards 1.16 in the latter part of 2026. In the case of USD/JPY, there are two distinct perspectives. One group anticipates an upward movement toward 164 by the end of 2026, arguing that the Bank of Japan’s rate hikes are already accounted for, while fiscal expansion and significant differentials contribute to a weaker yen. Conversely, another group predicts a decline toward 140, suggesting that the narrowing of rate gaps and risk-off scenarios will lead to a reversal of carry trades. The interval spanning from 164 at the upper end to 140 at the lower end, approximately 1,500 pips from the present 156 level, emphasizes the significant variability in potential outcomes.