The USD/JPY pair is currently at 155.80, reflecting a 0.30% increase for the day, and is maintaining proximity to a two-week high as global investors prepare for the Federal Reserve’s decision this Wednesday. The current market scenario presents an unusual divergence: Japan is shifting towards tightening measures, whereas the U.S. is gearing up for easing policies. The division in structural policy has led to increased volatility in yen pairs, reaching multi-month highs. Traders are adjusting their exposure in response to Japan’s 7.6-magnitude earthquake and robust wage data that support the Bank of Japan’s tightening stance. Japanese wage growth persists in reshaping the BoJ’s macroeconomic position. In October, average cash earnings experienced a year-on-year increase of 2.6%, an improvement from the 2.1% recorded in September, indicating a third consecutive month of growth momentum. Overtime compensation increased by 1.5%, indicating persistent demand in the labor market. The union federation UA Zensen intends to pursue a 6% wage increase in 2026, following a successful 4.75% rise in 2025, thereby intensifying structural inflation pressures. The BoJ swaps curve currently indicates a 90% likelihood of a 25bps rate increase to 0.75% on December 19, marking the most assertive pricing since the bank moved away from yield curve control. The markets view this as the concluding stage of extremely accommodative policy, signaling the conclusion of Japan’s prolonged deflationary period that persisted for more than thirty years.
Revised Q3 GDP data indicated that the economy contracted by 0.6% quarter-on-quarter, which is a deterioration from the initial estimate of a 0.5% decline. However, the GDP deflator — a broad measure of inflation — surged to 3.4% from 2.8%, confirming entrenched price momentum. Private consumption increased by 0.2%, surpassing initial expectations, whereas capital expenditure decreased by 0.2%, contradicting previous estimates. The data underscores the perspective that inflationary pressures in Japan have transitioned to a structural nature rather than being merely cyclical. In light of the subdued growth headline, the nominal economy continues to demonstrate resilience, supporting the Bank of Japan’s transition towards normalization. Across the Pacific, the Federal Reserve is anticipated to implement a 25bps rate cut this week, with sources indicating an 88% probability. Nonetheless, the speculation surrounding a “hawkish cut” continues — indicating that the Fed may lower rates while also conveying a warning against swift easing in 2026. Core PCE inflation at 2.8% year-on-year continues to exceed the target, constraining Chair Powell’s ability to adopt a dovish stance. U.S. Treasury yields increased overnight, bolstering the dollar’s recovery; however, investors are expecting three to four rate reductions in the coming year as inflation eases and growth slows down. The increasing gap between BoJ tightening and Fed easing has positioned the USD/JPY pair at a critical policy juncture.
The recent 7.6-magnitude earthquake in northern Japan has injected new uncertainty into the timing of monetary policy decisions. Damage assessments continue, but expectations are set for fiscal stimulus to follow, which will likely increase government borrowing and push Japanese Government Bond yields higher. Ten-year JGB yields have risen to 1.97%, marking the highest level since 2007, driven by investor expectations of an increased reconstruction budget. While this dynamic bolsters the yen due to yield differentials, it also poses a risk of postponing the BoJ’s next rate hike if the economic disruption intensifies. Currently, market participants view the event as neutral for the JPY, weighing the optimism surrounding reconstruction against the associated policy risks. The pair has surpassed a descending channel established in November, indicating a confirmation of short-term bullish momentum. Resistance is identified at 155.50, which corresponds to the previous high from December, with additional levels at 156.15 and 156.60. A sustained break above 156.60 may create potential for movement toward 157.90, the peak observed in November, although the risk of intervention remains elevated in proximity to those levels. On the downside, immediate support is positioned at 155.27, with subsequent levels at 154.35 and the channel base at 154.00. The Relative Strength Index is currently positioned around 57, suggesting a slight bullish momentum, as the MACD persists in expanding within positive territory. The market is bracing for potential volatility increases as traders take measures to protect their positions in anticipation of the decisions from the Fed and BoJ.
CFTC data indicates that speculative long positions in the yen increased by 14% week-over-week, marking the most significant rise since May 2024. Hedge funds are positioning themselves for yen appreciation through early 2026, anticipating that rate differentials will narrow as the BoJ increases rates while the Fed decreases them. In the meantime, commercial traders continue to hold a net long position on USD/JPY for hedging purposes, indicating a focus on real-sector exposure rather than speculative activity. The U.S.–Japan 2-year yield spread has contracted to 412bps, a decrease from 437bps observed in early November — an important indicator that bolsters the outlook for yen strength in the medium term. Cross-asset behavior indicates an increasing sensitivity of the yen to U.S. yields. The pair’s 90-day correlation with the U.S. 10-year Treasury yield currently registers at 0.84, indicating that a 10bps decrease in U.S. yields generally results in a 0.4-point drop in USD/JPY. Implied volatility increased to 9.7%, rising from 7.5% the previous week, reaching the highest point since the intervention window in October 2022. Japan’s Ministry of Finance has refrained from intervention lately but remains prepared around the 158.00–159.00 range, which corresponds to previous coordinated actions. Considering the macroeconomic environment, USD/JPY appears tactically bullish while facing strategic vulnerabilities. The short-term trajectory suggests a likelihood of revisiting the range of 156.00–156.60, bolstered by U.S. yields and safe-haven capital movements in the aftermath of the earthquake. However, sustained wage acceleration and a confirmed BoJ hike would realign fundamentals, indicating a medium-term retracement toward 150.00, with extended downside to 140.00 in the next 6–12 months if Fed cuts accelerate. The 2023 low around 127.20 serves as the key technical support level for those bullish on the yen.