The USD/JPY pair experienced a notable decline in early December trading, moving down to 155.40 after a loss exceeding 100 pips during the London session, driven by a resurgence in yen strength in response to a clear hawkish stance from the Bank of Japan. The recent development signifies a notable transformation in market dynamics, as carry trade positions are being unwound in response to Japanese Government Bond yields reaching multi-year peaks. Market participants are adjusting their rate expectations across the Pacific, as the BOJ approaches a tightening stance while the Federal Reserve indicates a shift towards easing, thereby amplifying downward pressure on the pair’s movement. Japan’s recent Tokyo CPI readings have rekindled expectations for policy normalization. Headline inflation rose by 0.3% month-over-month and 2.7% year-over-year, whereas core inflation, which excludes fresh food, increased by 2.8%. This figure exceeded expectations and continues to remain significantly above the central bank’s 2% target.
The likelihood of a December rate hike has been strengthened, currently assessed at 56%, while the chances of a subsequent hike by October 2026 surpass 80%. Governor Kazuo Ueda’s statements indicated that policymakers are ready to consider rate increases “proactively,” highlighting that postponing tightening may lead to an undesirable acceleration of inflation. The announcement promptly elevated short-end yields, as 2-year JGBs reached 1% for the first time since 2008, while 20-year bonds achieved their peak levels since 2020. Increased Japanese yields have sparked a resurgence of the reverse carry trade, exerting pressure on speculative positions reliant on extremely low yen borrowing costs. With the surge in bond yields, leveraged traders initiated position reductions, resulting in a significant appreciation of the yen against major currency pairs, and the USD/JPY experienced a rapid decline of 0.7% for the day, coinciding with a simultaneous downturn in risk assets, including equities and cryptocurrencies.
Experts perceive this as a possible structural unwinding of the enduring carry trade, especially if the BoJ implements several rate hikes in the upcoming 10 months. The recent decoupling of the pair from U.S.–Japan yield spreads underscores the prevailing influence of positioning flows over fundamental factors in short-term fluctuations. As the BoJ approaches a tightening phase, the Federal Reserve continues to maintain a notably dovish position. Markets are anticipating a 25-basis-point rate cut for the December 9–10 meeting, with certain traders speculating on a total of 100 bps in cumulative easing by 2026. Recent U.S. economic data aligns with this expectation: the ISM Manufacturing PMI recorded at 48.2, marking its lowest level in three months, while the employment index fell to 44, indicating contraction. The anticipated leadership transition at the Fed, with Kevin Hassett as a possible candidate for chair, introduces additional downside risk for the dollar, considering his historically dovish statements.
The DXY Index has declined beneath 99.40, marking its lowest point in two weeks, which has intensified the pressure on USD/JPY. The technical structure of USD/JPY currently indicates significant deterioration following its breach below the mid-October uptrend. The pair is presently consolidating around 155.40, maintaining minor support at 154.50, with the significant support zone positioned at 152.69, corresponding to the 50-day SMA, and further structural support at 150.20, indicated by the 100-day SMA. Resistance levels are identified at 156.00 and 157.00, with the November swing high positioned at 157.90. Oscillators indicate a decline in momentum: the RSI has decreased to 54, reflecting a neutral position after previously exceeding 70, while the MACD has fallen below the signal line close to the zero axis, signaling a decrease in bullish strength. The price continues to stay above both moving averages, which supports a technically bullish structure; however, the indicators indicate a loss of momentum that aligns with trend exhaustion. Governor Ueda’s rhetoric signifies a crucial change in communication strategy for the Bank of Japan. His emphasis on “preemptive tightening” stands in stark contrast to the previous policy’s cautious approach. The market’s immediate reaction indicates a recalibration of yield spreads: Japan’s 10-year yield currently stands at approximately 1.05%, compared to 4.22% for U.S. Treasuries, resulting in a narrowing of the premium by 40 basis points in a mere two weeks. This compression diminishes dollar demand, especially from institutional investors involved in long USD/JPY positioning since late summer. The BoJ’s focus on wage data as a catalyst for tightening reinforces the argument for a gradual normalization, indicating that prolonged yen appreciation could continue into Q1 2026. The current political dynamics are contributing to increased volatility. Prime Minister Sanae Takaichi has expressed her backing for monetary independence, providing Ueda with the flexibility to operate without political limitations.
On the U.S. side, President Trump’s renewed push for energy subsidies and his criticism of “excessively high” rates have intensified the pressure on the Fed to expedite policy easing, further contributing to the softness of the dollar. The divergence in policy—tightening measures in Japan contrasted with easing in the U.S.—has emerged as the key macroeconomic factor influencing the reversal of USD/JPY. In the interim, global equities, such as the Nikkei 225, have experienced a decline of nearly 1.8% since the previous week, which has consequently increased demand for the yen as investors look for safety in a volatile market. Market participants are exercising caution, yet they have not adopted a fully bearish stance. The most recent CFTC positioning data indicates that leveraged funds have decreased net longs by 12% week-over-week, marking the most significant reduction since April. Retail sentiment remains divided, as 53% of traders continue to hold long positions, while daily volatility increased to 0.9%, in contrast to a 30-day average of 0.52%. If the pair closes decisively below 155.00, it would indicate a structural breakdown, possibly leading to a swift movement toward 152.80 and 151.50. On the other hand, reclaiming 155.75 might bolster short-term sentiment and reinstate the bullish channel, although the upside potential seems limited in the absence of renewed strength in U.S. yields. Given that Japanese inflation has exceeded expectations, bond yields are on the rise, and the credibility of the Bank of Japan has strengthened, the fundamental balance appears to have shifted unfavorably for USD/JPY. The medium-term outlook for the pair is now contingent upon the Federal Reserve’s decision regarding interest rate cuts next week. A dovish U.S. decision alongside a December BoJ hike would solidify a downward trend toward the 152.00 levels. From a technical and macro perspective, the pair continues to exhibit susceptibility to additional weakness, particularly if Ueda indicates another rate hike for Q1 2026. Given the weakening dollar strength, diminishing yield spreads, and increasing risk aversion, USD/JPY exhibits a bearish outlook in the short term; however, a rebound above 156.00 may momentarily halt the decline.