The recent shift in USD/JPY is influenced by a clear adjustment in interest-rate expectations across both sides of the Pacific. The recent Summary of Opinions from the Bank of Japan indicates a more hawkish stance, with multiple policymakers highlighting the necessity for an additional rate hike due to ongoing inflation pressures and concerns regarding yen weakness. The rhetoric, along with upward adjustments to GDP and inflation projections in the January outlook report, has shifted market expectations toward a rate increase in the first half of 2026 instead of delaying normalization further. Currently, real rates in Japan remain negative, leading the BoJ to discuss further measures without committing to a robust timeline. This situation clarifies why USD/JPY continues to trade in the mid-150s instead of swiftly declining towards 140. The current data environment exhibits volatility. Tokyo inflation has declined precisely as the Bank of Japan has become more outspoken regarding potential tightening measures, resulting in mixed signals. Tokyo CPI has significantly decreased, with core inflation trending down to approximately 2.1%. This development diminishes the immediate necessity for the BoJ to implement another hike and clarifies why market expectations for the next move have adjusted to favor spring rather than the upcoming meeting. Earlier in the week, weaker Tokyo inflation and soft retail sales briefly pushed USD/JPY back up toward 155 after it had traded as low as roughly 152.09, marking the weakest level for the pair since October, as yen buyers took profits and macro funds faded the hawkish reaction. The pair’s intraday response to the Summary of Opinions – surging to approximately 155.24 before retreating to 154.82 – indicates a market that is preparing for tightening yet hesitant to completely factor in a swift BoJ hiking cycle, especially as the most recent inflation data shows a cooling trend rather than an uptick.
Domestic politics are currently influencing the USD/JPY exchange rate directly. Prime Minister Sanae Takaichi is advocating for expansionary fiscal measures and pre-election commitments, which may encompass tax reductions and new stimulus initiatives. This combination raises enduring concerns regarding Japan’s fiscal trajectory at a time when the BoJ is attempting to shift away from its ultra-easy monetary policy. The markets recognize that a more relaxed fiscal approach combined with only gradual monetary tightening is fundamentally detrimental to the yen. Consequently, this policy combination is encouraging investors to continue funding trades in yen, even amidst discussions of potential rate increases. Simultaneously, authorities have consistently established a threshold when USD/JPY exceeds levels that domestic politics can accept. Market participants recall the interventions of 2024 when the rate surged past 155 and reached 160; the present level around 155 is once more “politically sensitive,” constraining the market’s willingness to pursue further gains in the pair before assessing the Ministry of Finance’s tolerance. The risk of intervention has become a structural limitation on USD/JPY, despite the fundamentals continuing to favor a robust pairing in the near term. Repeated verbal warnings, reports of unusual rate checks, and the historical pattern of direct FX operations whenever the yen sells off too quickly all serve as critical context for every movement above 155. The carry trade is predominantly positioned with short yen and long higher-yielding currencies. Consequently, any indication of potential intervention or a more assertive approach from the BoJ could lead to a swift reversal. A significant carry reversal akin to mid-2024 would probably drive USD/JPY down considerably, with the 150 level and subsequently the 146.58 region from the previous major low serving as key points for forced deleveraging. The asymmetry present – constrained upside stemming from intervention risk and considerable downside if the BoJ or the Ministry of Finance impose a reset – is a primary factor contributing to the medium-term skew for the pair leaning bearish, despite the price remaining in the mid-150s range.
On the US side, the dollar has moved away from its previous “peak hawkishness” stance, yet it remains robust enough to sustain elevated levels of USD/JPY. The increase in the ISM Manufacturing PMI from 47.9 in December to an anticipated and reported figure near 48.3 indicates that the US industrial sector continues to contract, albeit at a less alarming rate than previously expected. This development helps to mitigate recession risks and supports the strength of the dollar. Producer inflation continues to exhibit persistence, with the headline PPI hovering around 3.0% year-on-year and core PPI at approximately 3.3%. Meanwhile, the most recent CPI figure has emerged slightly elevated at about 3.2%. The data supports the prudent approach taken by the Federal Reserve and clarifies why officials such as Alberto Musalem and Raphael Bostic continue to emphasize that policy must remain “slightly restrictive,” with an effective neutral rate band situated between 3.50% and 3.75%. Fed funds futures indicate a mere 13% likelihood of a cut in March, while the probability for a June cut stands at approximately 62%. This suggests a gradual easing cycle rather than an aggressive approach. The prevailing conditions maintain US yields at a level that makes funding longs in USD/JPY appealing from a carry perspective, especially as the Fed has not fully shifted towards a dovish stance yet.
The selection of Kevin Warsh as the upcoming Fed Chair introduces an additional element of hawkish sentiment to the US perspective. Warsh is viewed as an individual likely to oppose early cuts, aligning with the observed strength of the dollar across the G-10 spectrum, as the greenback has risen by more than half a percent against the yen and over 1% against the Swiss franc in the most recent daily heat maps. The recent developments have contributed to the stabilization of USD/JPY, which has shown a gradual upward movement, currently reflecting values between 155.20 and 155.60 following three consecutive days of gains. However, the market is already factoring in a cautious Fed, and the strength in the dollar is now contributing more to maintaining the pair near current levels than to initiating a new sustained upward movement beyond 160. As the year advances and discussions transition from “if” to “how many” Fed cuts in 2026, the US aspect of the differential is likely to begin exerting pressure on USD/JPY. This is particularly true if the BoJ embarks on a gradual series of hikes and indicates a higher long-term neutral rate in the 1.5%–2.5% range, rather than the 1%–1.25% band that some investors continue to expect. Currently, USD/JPY is positioned at a significant inflection point. On the daily chart, the pair is fluctuating around the nine-day exponential moving average close to 154.85 and continues to be constrained by the 50-day EMA at approximately 155.63. The 50-day has begun to decline, which traditionally serves as an early indicator that momentum is weakening, even when the spot remains near recent peaks. The pair is concurrently evaluating the upper limit of a descending channel, facing immediate resistance near 156.00. A clean daily close above 156.00 and sustained trade above the 50-day EMA would pave the way toward the six-month high near 161.00 and subsequently the long-term peak around 162.00 from July 2024. However, this scenario would likely provoke heightened intervention threats. A decisive break below the nine-day EMA at 154.85 would indicate that the short-term corrective phase is reasserting itself, potentially leading to a test of the three-month low at 150.02 from January 27, followed by the lower channel boundary near 149.20. Below there, the 200-day EMA becomes critical support; a sustained move under that longer-term average would indicate a genuine trend reversal and bring 146.58 and then the 140 handle into focus over a 6–12 month horizon.
Momentum indicators suggest that the market is reaching a peak rather than initiating a new impulsive rally. The 14-day Relative Strength Index has rebounded from a significantly oversold level of approximately 23, now positioned in the mid-40s, currently around 46. The current level indicates a neutral stance rather than a bullish one; it reflects a cooling of extreme yen buying, yet the buying pressure in USD/JPY remains insufficient to elevate the RSI above 50 and establish a sustained upward trend. The Japanese yen exhibits a mixed performance in the currency markets. While it has shown weakness against the US dollar, euro, and pound, it has demonstrated greater resilience against commodity currencies such as the Australian dollar and Canadian dollar. This suggests that sellers of the yen are exercising a more selective approach, as evidenced by the small positive percentage changes in these pairs. The observed pattern is characteristic of a late-stage up-cycle for the USD/JPY, where the core dollar-yen pair remains high due to rate differentials. However, the overall weakness of the JPY begins to diminish as concerns regarding value and intervention risks increase.
The forthcoming Japanese election represents a significant volatility event for USD/JPY. Markets are assessing the implications of a potentially stronger mandate for Prime Minister Takaichi, particularly regarding the likelihood of increased fiscal stimulus and tax reductions. Such developments could lead to a rise in JGB supply, prompting the Bank of Japan to remain cautious about accelerating interest rate hikes. Simultaneously, should the BoJ convey an elevated estimate of the neutral rate – say 1.5%–2.5% instead of 1%–1.25% – carry traders will need to reassess their models and might conclude that long-term short-yen positions are not guaranteed to yield positive returns. The shift, along with any actual or potential intervention, may initiate a typical carry unwind reminiscent of mid-2024, when congested positions were liquidated and USD/JPY experienced a significant decline in a brief period. The current risk-reward dynamics suggest a shift towards that type of event in the coming year: US-Japan rate differentials are expected to decrease as the Fed implements cuts and the BoJ raises rates, while market positioning remains significantly unfavorable for the yen.