The USD/JPY pair concluded the week at approximately ¥155.80, reflecting an increase of about 0.30% and successfully ending a two-week decline. The price has fluctuated throughout the month, hovering around the ¥155 mark on the lower end and the ¥158 level on the upper end. The two levels currently delineate the immediate area of contention. To re-establish the previous uptrend, bulls need to surpass the ¥158 level, which serves as the resistance point. Below, ¥155 serves as the initial support level; a sustained breach would pave the way to ¥153, which is the subsequent significant demand zone referenced in the weekly commentary. The overarching framework is evident. The USD/JPY has experienced a rally of approximately 5.4% in Q4 and around 8.2% in the first half of 2025, indicating that the prevailing trend remains upward. However, this trend is now intersecting with a Bank of Japan that is finally shifting away from its ultra-easy policy, while the Federal Reserve has already initiated its cutting cycle. The shift alters the rationale behind purchasing every dip in USD/JPY, redirecting attention towards policy spreads, carry trades, and the potential risk of a regime break.
On the U.S. side, the Fed’s latest dot plot indicated only one rate cut projected for 2026. This represents a hawkish position compared to the market’s previous pricing several months back, contributing to the halt of USD/JPY’s two-week decline. The upcoming U.S. data releases are critical to watch. Average hourly earnings are anticipated to be approximately 3.8% year-on-year, with the unemployment rate expected to hover around 4.4%, and nonfarm payrolls projected at about 55k compared to the previous figure of 119k. A softer jobs print alongside a steady 4.4% unemployment rate would indicate a gradual cooling trend in the labor market, rather than a collapse. The Consumer Price Index is projected to increase to 3.2% year-on-year, a rise from 3.0% in September, following the omission of the October report due to the government shutdown. A slightly elevated inflation reading, coupled with a persistently tight services sector, where the U.S. services PMI is projected at approximately 53.0 compared to 54.1, reinforces the Federal Reserve’s stance of maintaining rates at elevated levels for an extended period rather than pursuing a rapid easing strategy. In the case of USD/JPY, this indicates that U.S. yields might not decline rapidly enough to warrant significant yen appreciation based solely on policy considerations. The support for the dollar continues to hold firm as long as market sentiment perceives that the initial Federal Reserve rate cut in 2026 will be gradual and modest, despite the Bank of Japan taking a contrasting approach.
Conversely, the narrative on the Japanese side presents a different scenario. The Bank of Japan is anticipated to increase its policy rate by 25 basis points, bringing it to approximately 0.75% during the December meeting. This marks the initial increase in 11 months, representing a gradual move towards normalization, distancing from negative rates and extensive yield-curve control. The more critical aspect is the forward guidance. Should the BoJ indicate that a “neutral” policy rate is approximately 1.5% to 2.0%, the market is likely to interpret this as an opportunity for multiple rate hikes throughout 2026. A neutral band in that range suggests an additional 75–125 basis points may be anticipated in the future. The narrative surrounding USD/JPY shifts at this point. For years, this pair has served as the fundamental funding pillar of global carry trades. Investors took advantage of near-zero JPY rates to acquire higher-yielding U.S. and global assets, opting to leave the currency risk unhedged due to the consistent weakening of the yen. The current rate differential is decreasing, and forward markets are already reflecting an expectation of a stronger yen over the next five years. The inconsistency between declining US–Japan rate spreads and the persistently elevated USD/JPY levels is not tenable. An established path for BoJ rate hikes, along with stronger yields on Japanese Government Bonds, will lead to heightened hedging demand, elevate dollar funding costs, and necessitate a gradual unwinding of those carry structures. The unwind serves as the mechanism capable of driving USD/JPY lower, even in a scenario where U.S. rates remain comparatively elevated.
The domestic Japanese data set supports a more aggressive stance from the BoJ. The Tankan Large Manufacturers Index is projected to rise from 14 to 15 in Q4, indicating a positive shift in sentiment among major industrial firms, even amidst global trade uncertainties. This type of action indicates increased investment and bolsters wage growth. The S&P Global Services PMI is anticipated to decline from 53.2 to 51.6. That represents a deceleration, yet remains well above the 50 expansion line. With services accounting for approximately 70% of Japanese GDP, maintaining a level above 50 indicates that the overall economy continues to grow. Trade numbers are also becoming favorable. Export growth is projected to increase to 4.8% year-on-year, up from 3.6%, whereas imports are expected to rise by 2.5%, compared to 0.7% previously. Japan’s trade-to-GDP ratio stands at approximately 45%, indicating that even minor percentage fluctuations are significant. The core-core inflation rate, excluding the more volatile categories of food and energy, is projected to hold steady at approximately 3.1% year-on-year. The figure exceeds the 2% target set by the BoJ and appears to be persistent rather than transient. In summary, the robust manufacturing sentiment, consistent growth in services, enhancing trade conditions, and core inflation remaining at 3.1% provide the Bank of Japan with justification to consider an interest rate hike and maintain a tightening stance as a viable option. For USD/JPY, this reinforces the medium-term outlook of a strengthening yen and suggests caution against viewing 150–160 as a lasting new range.
Currently, USD/JPY remains positioned above its 50-day and 200-day exponential moving averages, reinforcing a bullish long-term trend outlook. However, the price structure has become increasingly convoluted. On the weekly frame, the pair has experienced a rally in Q4; however, the recent upward movement has encountered resistance and reversed on two occasions. The November peak around 157.89 represented the threshold at which both verbal and possible direct intervention by Japanese authorities limited further gains. That level is now a firm resistance benchmark. On the downside, ¥155 has transitioned from previous resistance to initial support, with intra-week wicks testing below and rebounding. A conclusive daily close below ¥155 would activate the 50-day EMA and highlight the ¥153 region identified in the previous weekly note as essential support. Below ¥153, the significant level is ¥150, which corresponds with the 200-day EMA zone and the previous breakout area. A sustained move below ¥150 would indicate a complete trend reversal on the daily chart and confirm that the ascent from the 130s to the high-150s has reached its peak. To achieve a squeeze higher, it is essential for bulls to surpass ¥158 initially and subsequently retest the 157.89 high with strong conviction. At that point, the practical upper limit approaches 160, at which the likelihood of significant verbal or direct intervention increases considerably. This market is currently in a late-stage uptrend, presenting asymmetric risk: there is limited upside potential above the 158–160 range, while a significant downside risk emerges if the 155 and particularly the 150 levels are breached.