USD/JPY is positioned within a structurally bullish zone, even amid a weak US Dollar and a distinct risk-off environment. Spot has fluctuated between approximately 157.50 and the high-159s, following a year-to-date peak near 159.45 and remaining just under the psychologically significant 160.00 level, where authorities intervened around 160.23 in 2024. Simultaneously, the Dollar Index has declined to approximately 98.28, US indices are experiencing downward pressure, and volatility has increased, with the S&P 500 down roughly 1.6% and the VIX surging over 20%. Typically, that combination would bolster the Yen. Currently, USD/JPY stays high as the primary influence shifts away from global risk sentiment or traditional rate differentials, focusing instead on Japan’s internal fiscal path and the recent political upheaval in Tokyo. The recent surge in USD/JPY can be attributed to Prime Minister Sanae Takaichi’s announcement to dissolve parliament and initiate a snap lower-house election scheduled for 8 February. With the announcement of the election, a two-year suspension of the 8% food consumption tax was introduced. In response, opposition parties are quickly proposing even more substantial reductions, including complete elimination funded through alternative revenue sources. Regardless of which proposal prevails, the trajectory is evident: fiscal policy is becoming increasingly expansionary, rather than contracting. The bond market’s response was severe. The 40-year JGB yield reached unprecedented levels, while the 30-year yield surged approximately 25 basis points in a single session, marking one of the most significant shifts in years. The entire curve underwent a repricing, with the 2s10s spread steepening past 100 basis points as investors sought a greater term premium for holding long-dated Japanese debt. Inflation expectations have risen to approximately 1.9%, and there is growing concern in the market that ongoing populist measures may exacerbate an already delicate fiscal situation. The combination of elevated long-end yields, an expanding yield curve, and fiscal uncertainty poses significant challenges for the Yen while bolstering USD/JPY. This situation erodes confidence in Japan’s long-term policy framework, particularly as global investors continue to utilize the Yen as a low-yielding source for carry trades aimed at higher-return investments overseas.
The Bank of Japan has raised its overnight rate to approximately 0.75%, marking the highest level in three decades, while core inflation has consistently exceeded the 2% target for four straight calendar years. Certain policymakers are candidly exploring the possibility of an increase as soon as April, which is sooner than what many had anticipated. Attention is now directed towards the BoJ decision this Friday, with expectations that the headline rate will hold steady at 0.75%. The actual event risk is centered around the statement and Governor Ueda’s press conference: any indication that the next hike is approaching, or that there is less tolerance for JGB volatility, would be significantly more impactful than maintaining a consistent policy rate. Despite this hawkish tilt compared to Japan’s historical stance, the BoJ continues to proceed with caution and in small steps. The gradual normalization stands in stark contrast to the assertive fiscal approach. In straightforward terms, fiscal and monetary policy are operating at cross purposes. The government is actively stimulating demand, which is contributing to rising inflation expectations, whereas the BoJ is gradually easing its accommodative stance. Real rates continue to be significantly negative, and as the curve steepens due to fiscal concerns, the overall impact remains unfavorable for the Yen. That is why USD/JPY may continue to rise, even as markets anticipate a slight possibility of another rate increase around April and with inflation already exceeding the target. As long as the BoJ refrains from providing a definitive indication that it is prepared to take strong measures against Yen weakness, traders will persist in viewing the currency as a means of funding rather than a goal.
The wider macroeconomic context typically presents an ideal scenario for the appreciation of the Yen. Former President Trump has indicated the potential for new 10% tariffs on imports from eight European nations beginning 1 February, with the chance of further escalation linked to ongoing tensions regarding Greenland. European officials are in discussions regarding a potential retaliation amounting to approximately €93 billion. Gold has reached unprecedented levels, approaching 4,760 dollars per ounce. Bitcoin has fallen below 91,000, while US equity indices are experiencing notable pressure, with the Dow declining by over 600 points and the S&P 500 down approximately 110 points for the day. The Dollar is experiencing pressure due to a prevailing “Sell America” narrative, resulting in a nearly 1% decline in the Dollar Index, while European currencies like the euro are gaining strength. Fixed-income volatility remains high, and risk assets are experiencing instability, creating a risk-off environment that typically drives capital towards traditional safe havens such as the Yen and Swiss franc. There are certainly areas where the Yen is demonstrating defensive behavior. A daily performance heat map indicates that JPY experienced intraday gains against the US Dollar, rising approximately 0.19% at one point, while also making progress against several other major currencies. However, those actions are minimal when viewed in the context of the overall landscape. The USD/JPY remains positioned near the upper boundary of its multi-month range, showing resilience rather than a decline. Domestic Japanese factors are significantly influencing global risk dynamics. Investors prioritize the fiscal trajectory and the steepening JGB curve over transient fluctuations in risk appetite. This is particularly relevant as safe-haven demand can now shift towards gold or high-grade European assets, while the Yen remains linked to a government that is openly increasing its spending ahead of an election.
The steepening of the JGB curve is not merely a technicality within the bond market. It indicates that investors are scrutinizing the long-term viability of Japan’s fiscal trajectory and are seeking compensation for anticipated inflation and possible supply constraints. Long-dated yields rising significantly while short-dated yields remain stable around 0.75% indicates that markets anticipate increased price pressure and heightened issuance risk in the future. The decline in credibility is detrimental to the Yen, although in the immediate term, elevated yields may draw in some marginal foreign interest. Additionally, the global carry trade continues to position itself unfavorably for JPY. Given that US policy rates remain significantly higher than those in Japan, alongside numerous central banks presenting yields that appear appealing in contrast to 0.75%, the Yen persists as an economical source of funding. Strategies involving portfolios and hedge funds that utilize borrowing in Yen to acquire higher-yielding assets in the US, Europe, or emerging markets remain active. Even on a day when the Dollar is broadly weak and equities are under pressure, those structural flows remain intact unless volatility escalates to a level where carry becomes unsustainable. At this moment, that threshold remains unachieved. Consequently, the most favorable trajectory for USD/JPY continues to trend upward, provided there is no significant alteration in BoJ communication or an unexpected intervention indicating a strict stance on currency depreciation.
The current price dynamics in USD/JPY illustrate this underlying fundamental tension. On intraday charts, the pair has rebounded from the 61.8% Fibonacci retracement of the January upswing around 157.40 after a brief dip into that area, and it is currently trading within that support level and the 38.2% retracement, which is positioned just below the 100-hour Simple Moving Average near 158.35. The hourly 100-SMA at approximately 158.35 serves as a significant pivot point. As long as the spot stays beneath that declining average, short-term momentum is limited, and the intraday bias leans slightly bearish for the day; however, the overall structure is not definitively negative. The MACD on the hourly timeframe is positioned near the zero line, with the histogram showing signs of flattening, indicating a neutral momentum environment instead of a robust directional signal. The RSI hovering near 50 indicates that the market is currently balanced following the recent pullback from its peak levels. A clean break below the 38.2% retracement would shift focus to the 50% retracement around 157.80, followed by the 61.8% level at 157.40. The identified areas align with previous price reaction zones, establishing the initial layer of demand. If those levels fail, the focus would shift to the broader support band between approximately 157.00 and 156.70, which has already provided support during declines on two occasions this year. Further down, a deeper correction could extend toward 156.00, where prior horizontal support and the rising medium-term trend line begin to converge.