Toward the end of 2025, USD/JPY is positioned near the year’s peaks, reflecting a distinct bullish trend stemming from the prolonged carry trade, yet it is beginning to exhibit signs of weakening momentum. The pair has been fluctuating for nearly two years within a broad range of approximately 140 yen to 160 yen per dollar, and the price movement observed in late 2025 positions it close to the upper limit of that spectrum. The primary factor influencing this movement is straightforward: U.S. rates hovering around the mid-3% range compared to Japanese yields that have only recently edged up to approximately 0.75%. The inquiry for 2026 revolves around whether Japan’s eventual policy tightening, in conjunction with the Federal Reserve’s movement towards neutrality, will be sufficient to transform USD/JPY from a consistent carry vehicle into a potential range reversal candidate. The primary driver of the 2025 rally in USD/JPY has been the significant policy divergence between the Federal Reserve and the Bank of Japan. By the conclusion of 2025, Japan is anticipated to have its policy rate positioned at approximately 0.75%, following a majority of the timeframe maintained near 0.50%. Conversely, the United States stands at approximately 3.75%, Canada is around 2.25%, and the euro area is close to 2.15%.
The yen remains positioned at the lowest tier of the developed-market yield hierarchy. Japanese fixed-income assets continue to lack appeal for global investors when juxtaposed with U.S. Treasuries or European bonds. This yield disparity elucidates why USD/JPY has been able to maintain its position near the upper end of its multi-year range instead of experiencing a downward collapse. As long as investors can borrow at nearly zero rates in yen and allocate capital to higher-yielding dollar assets, the inherent motivation is to maintain a long position in USD against JPY on a carry basis, and the price movements in 2025 illustrate that reality. The landscape heading into 2026 diverges from previous cycles, as Japan is no longer facing temporary price surges that swiftly revert to negligible levels. Following a dip to an annual inflation low of approximately 2.7% in August, the rate has risen to about 3.0% in October, once more exceeding the Bank of Japan’s 2% target. This indicates that underlying pressures are persisting rather than dissipating. The trends in wage dynamics support that assertion. By the conclusion of 2024, average wage growth stood at approximately 3.6%, with projections indicating it will surpass 4.0% by late 2025. The current wage inflation in Japan is unprecedented for decades, directly contributing to domestic demand, bolstering consumption, and sustaining elevated prices through 2026. The political layer holds significant importance as well. The ongoing weakness of the yen has emerged as a significant concern, with rising import prices driving up costs for energy, food, and manufactured goods. Policymakers are now framing yen weakness as a macroeconomic risk instead of a means to stimulate growth. The prime minister has clearly identified currency depreciation as a significant challenge for the economy in 2026, increasing the pressure on the Bank of Japan to reconsider its ultra-loose policy stance.
The probable scenario suggests that Japan will commence 2026 as one of the limited major economies continuing on a tightening trajectory, implementing rate increases from 0.50% to 0.75% and potentially further to bolster the currency. The shift establishes a critical basis for a medium-term downside bias in USD/JPY, contingent upon market recognition of the BOJ’s genuine commitment. The dollar aspect of USD/JPY is being influenced by varying factors. Recent U.S. data show strength: preliminary GDP registered approximately 4.3%, surpassing expectations of about 3.2%, which confirms solid growth and supports risk appetite. Unemployment claims reported slightly better than anticipated, with no significant adverse surprises in the primary indicators. Despite that, markets are not reflecting expectations for a new Fed hiking cycle. They continue to anticipate approximately two rate cuts of 0.25% throughout 2026, resulting in a total easing of 0.50% projected. This approach does not constitute aggressive easing, and it maintains higher U.S. yields in comparison to Japan. However, this also suggests that the peak dollar-yield advantage is likely in the past. The U.S. Dollar Index concluded the week with a bearish weekly candle that engulfed the prior body and settled near the lows, indicating short-term downside momentum despite the absence of a clear long-term trend. The recent performance of the greenback shows it as the weakest major currency, while the Australian dollar has taken the lead in gains. As we look towards early 2026, the overall foreign exchange landscape indicates a softer dollar rather than a significant upward trend. In the case of USD/JPY, the narrative evolves into a two-sided squeeze: a Bank of Japan that gradually adopts a hawkish stance and a Federal Reserve that moves towards neutrality can both counter the prolonged long-dollar positioning established over the past two years.
From a structural chart perspective, USD/JPY has been confined since January 2024 within a wide lateral range, featuring an upper boundary around 160 yen per dollar and a lower limit near 140 yen. The upper boundary has undergone multiple reinforcements, with price struggling to maintain levels above the 160.000–160.600 region last observed in 2024. In 2025, the dollar’s rebound against the yen drove USD/JPY closer to this resistance level; however, every move into the upper decile of the range swiftly encountered fresh selling pressure. On the downside, dips into the low-140s have attracted buyers who continue to see that range as appealing for reestablishing carry positions. As we look towards 2026, the prevailing trend is a lateral structure: in the absence of a substantial policy shift, the pair is expected to fluctuate within these limits rather than decisively move beyond them in either direction. The risk, however, is that once the market perceives the BOJ will continue its rate hikes while the Fed has concluded, the entrenched belief that 140 will hold may be put to the test, leading USD/JPY to potentially explore the lower half of the range instead of remaining close to 160. Momentum indicators have begun to signal that the bullish phase in USD/JPY is reaching its maturity. On the weekly chart, the Relative Strength Index has rolled over and is now trending lower, indicating that the average upside momentum has diminished as we approach the final weeks of 2025. Concurrently, the MACD histogram has been steadily declining toward the zero line, indicating a gradual weakening in the strength of the weekly moving averages that previously bolstered rallies. This easing technical environment aligns with the real trading outcomes. A recent strategy advocating for a long USD/JPY position for the week incurred a loss of approximately 0.76%, despite other recommended trades within the same portfolio yielding significant gains. The recent underperformance indicates that purchasing the pair at high levels as we approach year-end holiday liquidity is no longer a guaranteed success. The observation that the dollar was the weakest major currency while the Australian dollar emerged as the strongest emphasizes a significant shift: capital flows have moved away from the straightforward long-USD strategy that prevailed earlier in the cycle.
Defined price points offer a precise guide for USD/JPY in 2026. On the topside, 160.600 continues to serve as the critical resistance level, delineating the upper limit of the complete 2024–2025 range. A return to that zone would necessitate a fresh increase in U.S. yields or a significant downturn in yen sentiment, likely drawing considerable official attention due to past intervention experiences at comparable levels. The next significant level is approximately 149.271, coinciding with the 50-period simple moving average on the weekly chart. A retreat to that region would signify a significant reversal of late-2025 bullish momentum and would effectively denote the midpoint between the extremes of the range. Below that, 144.300 serves as the primary structural support, aligning with the 200-week moving average and representing a clear inflection point for long-term trend followers. A sustained break into and below the 144.300 area would indicate that sellers have gained control, suggesting that the multi-year dollar ascendancy over the yen is shifting into a broader downtrend. Currently, the price remains nearer to the upper boundary, resulting in an asymmetrical situation: the potential for an increase toward 160.600 is constrained and subject to political factors, whereas the possibility of a decline toward 149.271 and 144.300 presents greater opportunity if macroeconomic drivers align.