The USD/JPY pair begins 2026 positioned around the 156 mark, fluctuating approximately between 156.20 and 156.70 following multiple unsuccessful attempts to reach the 158 cycle high. The recent two sessions have seen a dollar rebound amidst extremely thin year-end liquidity, amplifying the impact of each policy headline. The dollar index remains positioned between 98.00 and 98.30 following a nine-day recovery, yet it has experienced a decline of approximately 10% over the last twelve months. The current mix positions USD/JPY at historically elevated levels for the yen, with sufficient dollar backing from positioning and policy ambiguity to avert a clear downside breach at this moment. The recent minutes from the Federal Reserve illustrate the reasons behind the dollar’s ability to attract buyers, despite a decline in interest rates. In December, the Fed implemented an additional 25 basis point cut, adjusting the funds range to 3.50%–3.75%. This marks the third reduction of 2025 and is now characterized as approximately neutral rather than distinctly restrictive. The decision, however, lacked consensus: three members opted to maintain rates unchanged, marking the largest dissent block since 2019. This is significant for USD/JPY as it indicates a robust internal resistance to further easing, particularly with inflation persisting above 2%.
Futures continue to indicate approximately two more cuts in 2026, with the greatest likelihood occurring around late March and subsequent meetings; however, these probabilities fluctuate significantly with each labor and inflation report. Weekly jobless claims at approximately 199,000, compared to forecasts of about 219,000, indicate that the labor market is not behaving as one would expect from an economy entering a significant cutting cycle. The Federal Reserve is clearly willing to accept inflation levels around 3.0%–3.5% for an extended period. The interplay of modest cuts, persistent inflation, and a noticeable hawkish stance serves to stabilize US yields, averting a decline in the dollar. This dynamic directly supports USD/JPY at higher levels, despite a challenging year for the overall dollar index. On the Japanese side, the narrative has shifted from negative rates to a gradual normalization; however, the policy remains quite accommodative in absolute terms. The Bank of Japan’s latest summary of opinions reveals a unanimous consensus to increase the uncollateralized overnight call rate from approximately 0.50% to about 0.75%, marking the highest level since 1995. Officials emphasize that Japan’s real policy rate is the lowest globally and describe it as “desirable” to gradually increase rates in order to support growth while managing inflationary pressures.
Alongside the previous 25 basis point increase in January 2025, this signifies a distinct move away from the extremely accommodative policy, contributing to the decline of USD/JPY from the 158 range to the present 156 level as markets reevaluate the long-term trajectory. Despite this, Japanese yields continue to be significantly lower than US yields, even following several Fed cuts, indicating that the rate differential still supports the dollar. The outcome presents a dual dynamic: a more assertive Bank of Japan establishing a soft cap on USD/JPY, alongside a persistently favorable carry that motivates investors to maintain long dollar positions as long as US rates do not decline too rapidly. The yield spreads and the composition of the dollar index clarify the reasons behind the USD/JPY remaining within a high yet comparatively limited range, rather than experiencing a breakout in either direction. The dollar index is positioned around 98.00–98.30, constrained by the 50-day exponential moving average at approximately 98.10 and the 200-day exponential moving average close to 98.60. Initial resistance is observed just below 98.75, a level that would validate a short-term base if breached decisively, while support near 98.00 serves as a foundation for the downside. The relative strength index, positioned just below 60, indicates a favorable momentum that is positive yet not excessive.
In this scenario, USD/JPY trading just below 156.70 and subsequently retreating toward 156.20 aligns with a market that is fundamentally long on dollars yet cautious about pursuing new peaks. The pair has moved away from the panic extremes observed during the one-sided yen selling, but it still remains significantly elevated compared to historical comfort zones. Provided that the yields on US two-year and ten-year bonds are kept in check by a gradual approach to rate cuts, and with modest hikes from the BoJ, the USD/JPY pair is expected to fluctuate within a wide range of 155.00–158.00, with significant data surprises being the only catalysts for a breakout. The perceived stability of USD/JPY above 156.00 conceals a delicate political and historical context for Tokyo. In 2024, Japanese officials dedicated significant efforts to issuing verbal warnings and intervening sporadically as the pair neared current levels. They contended that an excessive decline in the yen distorts import costs and undermines real household incomes. The decline from approximately 158.00 to the 156.00–156.70 range indicates a shift towards a more hawkish stance from the BoJ, alongside the belief that the Ministry of Finance will not accept uncontrolled yen depreciation. In the near term, support is positioned just below 156.00, with a notable demand area around 155.80 where short-term strategies have historically leaned towards purchasing on dips, employing stops near 155.10 and aiming for upside targets in the mid 157.00s. On the topside, the 158.00 region serves as a definitive threshold, merging the previous high, a significant psychological level, and the zone most likely to elicit more assertive official commentary. As long as USD/JPY remains within the range of approximately 155.00–158.00, the situation is evident: there is limited potential for upside, which relies on transient dollar surges, contrasted with a significant downside risk towards the low 150s once the markets fully incorporate a stronger stance from the BoJ or a formal threat of intervention.
The movement of USD/JPY is influencing the perspectives of Japanese investors regarding cross-asset positioning following a remarkable year for gold. Gold priced in dollars has recently achieved its most significant annual increase since 1979, while Japan gold futures concluded 2025 with an impressive rise of nearly 68%. This surge is bolstered by anticipations of Federal Reserve rate cuts, phases of dollar depreciation, and robust purchasing by central banks. For investors with yen as their base currency, USD/JPY serves as the conduit linking global gold trends to local returns. A more robust yen may limit or diminish profits in yen terms, even if gold priced in dollars remains stable, whereas a resurgence in dollar strength could amplify potential gains. A shift in USD/JPY from the present 156 level down to 150.00 due to accelerated BoJ normalization would strengthen yen purchasing power and probably lead to a decrease in local gold prices. Conversely, a rise above 158.00 resulting from postponed Fed cuts and a careful approach by the BoJ would support the rationale for maintaining foreign currency assets. In practice, cross asset allocators in Japan currently monitor USD/JPY in conjunction with US real yields as a fundamental factor influencing both equity and commodity exposure.