USD/JPY has transitioned from a consistent upward trajectory into a phase of consolidation just beneath the highs. Following a peak close to 158.90 in early January and reaching a high of 158.05, approximately 13.25% above the late-September low, the pair has retraced toward the mid-150s, with recent values around 154.90–155.90. The current structure indicates a lack of a clear breakout; the price has been fluctuating for several days between the support level near 155.00 and the resistance zone in the 158.00–159.00 range. The previous breakthrough of the 78.6% Fibonacci retracement from the earlier decline, along with the rise above the 50-day moving average, established a classic bullish flag and positioned the significant 160.00 level for consideration. The target remains in sight if the Bank of Japan maintains its current stance; however, the ongoing inability to surpass the 158–159 resistance level, coupled with the recent decline below short-term moving averages, indicates that upward momentum has diminished. Consequently, the pair may be at risk of downside movement should macroeconomic conditions shift.
Japan has ceased to be the low-inflation anomaly it maintained for decades, which has direct implications for USD/JPY. The growth in average cash earnings saw an increase from approximately 2.2% in October to about 3.0% in November, with overtime pay rising from 0.70% to nearly 1.60%. The headline consumer inflation rate increased from 2.3% in October to approximately 2.9% in November, and further to about 3.6% year-on-year in December. Meanwhile, the core CPI, which excludes food and energy, rose from 2.7% to around 3.0%. The current figures are comfortably positioned above the Bank of Japan’s 2.0% target, indicating the first extended period in years where Japan’s inflation aligns with or exceeds U.S. levels; during this timeframe, U.S. headline CPI has increased from approximately 2.7% to 2.9%. In this context, the BoJ has implemented two increases in its policy rate, moving the benchmark from negative territory to 0.25% in 2024 and subsequently to approximately 0.50%, marking the highest level since 2008. Market pricing at one point indicated nearly a 90% likelihood of an additional 25-basis-point adjustment, as investors remain attentive to the central bank’s actions in the upcoming meetings. Increasing wages, core inflation exceeding 3.0%, and a depreciating yen collectively support the case for additional normalization. Each incremental hike by the BoJ reduces the rate differential that had previously sustained a structurally weaker JPY.
The BoJ’s capacity to tighten in response to strength is not without bounds. Japan’s real economy is experiencing growth, albeit not at a vigorous pace. Recent GDP data indicated that output expanded approximately 0.7% in the third quarter, while full-year growth expectations are centered around 0.4%. Survey data highlight a dual landscape: the services PMI has risen from approximately 50.9 to near 52.7, indicating slight growth, whereas the manufacturing PMI has decreased from around 49.6 to 48.8, moving further into contraction territory. Elevated policy rates pose a threat to an already vulnerable industrial sector, particularly as Japanese manufacturers contend with fierce competition from Chinese automakers like BYD, Nio, and Xpeng, who are increasingly capturing market share on a global scale. If the BoJ exerts excessive pressure, it jeopardizes the narrative of recovery. The trade-off is a key factor in the bank’s reluctance to raise rates at every meeting, despite CPI being above target. Consequently, USD/JPY traders must weigh the medium-term normalization narrative against the potential risk of a swift pause in the tightening cycle should growth decelerate further.
On the U.S. side of USD/JPY, the narrative is evolving in the contrary direction. The Federal Reserve has executed a 25-basis-point rate cut at its concluding meeting of the year, aligning with forecasts and underscoring the notion that the apex of the cycle is in the past. Officials who initially anticipated approximately four cuts are now indicating around two reductions in the upcoming year, with markets projecting the first significant action around July, contingent on inflation approaching 2.0%. The headline CPI has increased slightly from approximately 2.7% to 2.9%, whereas core inflation has decreased marginally from around 3.3% to 3.2%. This situation results in positive real yields, though they are no longer experiencing significant upward movement. The Fed minutes highlighted apprehension that a new U.S. administration might elevate inflation through aggressive tariffs; suggestions for double-digit levies on imports would represent a distinct upside risk to prices. Labour data are pivotal to the Fed’s response strategy. Analysts anticipate that nonfarm payrolls will increase by approximately 150,000 jobs for December according to one estimate, while another suggests an addition of about 50,000 jobs. The unemployment rate is projected to be around 4.4% in some surveys, although recent data indicates a decline from roughly 4.2% to 4.1%. Private payrolls have occasionally fallen short of expectations, with one ADP report showing around 122,000 jobs added, which was below forecasts. Meanwhile, job vacancies have remained above 8 million, suggesting a market that is cooling but not in freefall. A separate delayed NFP release indicated that the economy added approximately 64,000 jobs in November, reinforcing the narrative of a slowing yet still positive trend in job creation. When considered collectively, the Fed component of the spread currently favors a gradual easing approach instead of further rate hikes, which typically limits the dollar’s potential gains against currencies where monetary policy is tightening.