The USD/JPY has entered a distinct bullish phase, surpassing the significant ¥157.75 breakout level on Friday and currently trading in the range of ¥157.9–¥158.0, reflecting an approximate increase of 3.98% over the past three months. The weekly candle concluded near the upper limit of the range, just beneath the significant ¥158 threshold, positioning the pair close to a new one-year high and directly below the peak zone for 2025. The significance of that close cannot be overstated: buyers demonstrated a readiness to embrace risk as the weekend approached, even in the face of substantial geopolitical tensions and impending U.S. inflation data. This indicates that the uptrend is not merely a fleeting spike but rather a sustained movement supported by macroeconomic factors and technical alignment. The context for USD/JPY is a U.S. economy that remains resilient. Recent data indicated that average hourly earnings increased by 0.3% month-on-month, preliminary inflation expectations remained unchanged, and the unemployment rate decreased from 4.5% to 4.4%, despite a moderation in payroll gains.
Services activity exceeded expectations, with ISM services reporting stronger results than anticipated, whereas manufacturing showed only a minor decline. The data collectively influenced market expectations, steering them toward a more hawkish trajectory. Futures are now reflecting over a 70% likelihood of rates being maintained in the 3.50–3.75% range at the March FOMC, a notable increase from under 50% just a week prior. The strength of the dollar is evident in the Dollar Index, which has reclaimed its position above the 55-day EMA at approximately 98.75, reversing a decline from 100.39 that reached a low near 97.74. The index continues to approach the 100.39 resistance level, with the potential to reach the 101.54 Fibonacci zone, indicating that the dollar side of USD/JPY is well-supported. The yields on U.S. 10-year notes are fluctuating within a narrow yet high range, consistently receiving support around the 4.136% 55-day EMA while facing challenges in breaking through the 4.200–4.207% range. This range aligns with the 38.2% retracement of the decline from 4.629% to 3.947%. A sustained break above 4.20% would pave the way for a move toward 4.63%, whereas a clear drop back below 4.13% would bring the 4.00% handle back into focus. For USD/JPY, the key consideration is that yields continue to be sufficiently elevated to maintain an appealing rate differential, even in the absence of a breakout. Concurrently, significant equity indices like the Dow are steadily advancing, finding support around 47,853 while attention turns to the 50,000 psychological milestone and anticipated gains towards 52,179. Robust equities combined with high yields create an ideal scenario for carry trades, with USD/JPY serving as the quintessential representation of that strategy. On the yen side, markets are compelled to reevaluate the extent and pace at which the Bank of Japan can proceed.
Rate expectations have gradually increased over the past year, with forecasts indicating that the policy rate may climb from 0.50% to approximately 0.75% by mid-year and possibly reach 1.00% by early 2026, contingent on persistent inflation. Japanese government bond yields have reached multi-year highs as investors reassess the long-standing belief that rates would remain largely below 1%. Even if the BoJ adjusts rates to the range of 0.75–1.00%, there remains a significant negative spread compared to U.S. policy rates exceeding 3.5%. The modest tightening of a few dozen basis points by the BoJ fails to bridge the disparity with the Fed or counterbalance the appeal of U.S. yields hovering around or exceeding 4%. This illustrates how USD/JPY can hover around ¥158 and continue to attract buyers, even in light of the prevailing discussion surrounding “BoJ normalization.” The dynamics of Japanese politics and equities are intensifying the depreciation of the yen. Speculation surrounding the Prime Minister’s potential snap election as soon as February, aimed at leveraging favorable approval ratings, has heightened anticipations for further fiscal stimulus and growth-focused initiatives. The equity market has reacted strongly, with Nikkei futures climbing toward and surpassing the 52,636 level, while forecasts indicate potential targets of 53,961 and even reaching the 57,918 zone based on extended projections. A domestic equity bull run prompts both local and foreign investors to allocate funds into yen while shifting towards Japanese stocks and global risk assets, contrasting sharply with traditional “flight-to-quality” behavior. The yen is reverting to its role as a funding currency rather than serving as a safe haven, which directly benefits USD/JPY due to this shift in dynamics. The flows validate the narrative. The primary yen ETF, designed to follow the performance of the Japanese currency against the dollar, experienced redemptions totaling approximately $5.87 million in just one day, representing around 1.25% of its total assets under management, which are approximately $468.9 million.
This represents a significant shift within a single session, indicating a clear trend of institutional funds moving away from yen exposure. Simultaneously, speculative positioning data indicates net yen positions at approximately 8.8k contracts, a decrease from 14.1k, suggesting that leveraged accounts have been reducing their yen long positions or increasing shorts. The reduction of remaining bullish yen positions coincides seamlessly with USD/JPY surpassing the ¥157.75 trigger and moving towards ¥158. Observing ETF outflows, a decrease in speculative longs, and a clear upside breakout in spot simultaneously conveys a straightforward message: the yen is experiencing a significant withdrawal of flows. From a technical perspective, USD/JPY is currently in a mature uptrend, though it has not yet reached exhaustion. The pair has surpassed the ¥157.75 breakout line noted on the daily chart, with the price closing around ¥157.9–¥158.0, approaching a significant previous high in the ¥158.86 area that served as structural resistance. Above that, the significant swing high near ¥161.94 emerges as the next clear objective. The weekly chart displays a robust bullish candle that concludes close to the upper range, affirming the presence of upward momentum. An important nuance exists: the inability to close firmly above the round ¥158 level introduces potential short-term uncertainty. However, as long as pullbacks remain above the prior resistance-turned-support in the ¥157.0–¥157.5 range, the breakout continues to be considered valid. A clean daily close above ¥158 would strengthen the trend and pave the way for a test of ¥158.86. A sustained break above this level would render a move toward ¥161.94 plausible.