The USD/JPY is hovering around the 157.00 level following a tumultuous round-trip that saw the pair rise from an October low of approximately 147.06 to a January peak near 159.45, before retreating to around 152 and subsequently rebounding. The rebound from just below 152 has already captured approximately 3.5%, positioning the spot for an estimated 1.5% weekly gain, while the Yen marks its second consecutive week as the weakest major currency. The current range of significance is 156.50–158.00: the pair is maintaining levels above the intraday low of 156.45 and is trading near 157.00 as market participants anticipate a likely decisive victory for Prime Minister Sanae Takaichi’s Liberal Democratic Party, alongside sustained carry demand heading into the weekend. Polls indicate that the LDP is likely to obtain a minimum of 233 seats, which is necessary for a simple majority in the Lower House. Additionally, various surveys highlight the potential risk of a coalition between the LDP and the Japan Innovation Party (JIP) aiming for the 310-seat supermajority threshold. A supermajority would enable the coalition to bypass Upper House opposition and push through extensive fiscal packages, particularly concerning given that Japan’s debt-to-GDP ratio is currently approximately 240%. The interplay of larger deficits in a heavily indebted nation has significantly contributed to the depreciation of the Yen since October. This dynamic clarifies the movement of USD/JPY, which surged from approximately 147.06 in early October to the 159.45 range by mid-January. Even a plain LDP majority, without a formal supermajority, still bolsters Takaichi’s position sufficiently to maintain market attention on increased borrowing, heightened bond supply, and a Bank of Japan that must navigate tightening cautiously. In the short term, this political environment is favorable for USD/JPY, as it strengthens the belief that Tokyo will continue to rely on accommodative monetary policy and fiscal measures to bolster growth.
In December, household spending experienced a decline of 2.6% year-on-year, following a 2.9% increase in November. This represents a shift of over five percentage points, indicating a notable negative surprise. The significance of private consumption, which constitutes approximately 55–60% of Japan’s GDP, cannot be overstated when it experiences a contraction of such magnitude. At first glance, this diminishes the argument for a proactive stance from the Bank of Japan, as reduced consumption generally dampens demand-driven inflation and heightens the potential risks to growth. The situation reveals that a portion of the decline in spending may be influenced by the foreign exchange market: a depreciating Yen increases the prices of energy and food, diminishing household purchasing power despite nominal wages remaining stable. The BoJ has indicated the necessity to address Yen weakness as a factor contributing to import-driven inflation; this is why discussions of “rate checks” and intervention resurfaced in the market when USD/JPY approached the 159 level. The outcome presents a challenging dilemma: permitting USD/JPY to rise further could exacerbate pressures on households, while tightening measures too rapidly may adversely affect consumers who are already reducing their spending. In the medium term, the prevailing outlook suggests that the BoJ is likely to incrementally raise rates throughout 2026, rather than remaining passive indefinitely – a development that would be favorable for the Yen once the electoral distractions subside.
On the US side, the dollar backdrop has shifted from a consistently bullish stance, yet the rate differential compared to Japan remains sufficiently broad to sustain carry trades. In the final week of January, jobless claims surged beyond expectations, and JOLTS job openings fell to their lowest level in over five years. Additionally, the ADP employment report indicated a slowdown, decreasing to approximately 22K from 41K in the previous month. The data has led to a heightened expectation for a March Fed cut, now estimated at approximately 24%, while the likelihood of a June cut has surged to over 80%, as indicated by Fed funds futures pricing. Simultaneously, consumer sentiment is projected to decline from 56.4 to approximately 55.0, indicating a potential slowdown in consumption and a continuation of disinflationary trends into the middle of the year. The current conditions suggest a more gradual and accommodating approach from the Federal Reserve throughout 2026. Even with one or two cuts, the disparity in policy remains significant compared to a BoJ that is at or just above zero. Consequently, USD/JPY has the potential to rebound toward the 157–159 range, even as the broader macroeconomic outlook for the dollar appears to be deteriorating over the next 6–12 months. To put it differently: the carry continues to yield benefits in the short term, yet the narrative surrounding rate differentials has reached its zenith.
Recent risk-off episodes have led to forced selling across precious metals, cryptocurrencies, and certain segments of global equities. Bitcoin has decreased from approximately $70,000, moving toward the $60,000–65,000 range, while gold has experienced a double-digit percentage correction from its late-January high of over $5,500 an ounce. Those moves have resulted in significant position liquidations in crowded trades; however, short Yen positions have not experienced the same widespread clean-out. Investors continue to engage in carry strategies, with pairs such as USD/JPY, USD/ZAR, and USD/MXN providing positive carry daily, provided that volatility remains under control. MUFG’s position that Yen shorts have not experienced significant pressure is evident in this week’s performance table: JPY has declined approximately 1.4% against USD and is weaker compared to most major currencies, despite a reduction in other favored trades. That indicates two key insights. Initially, there remains potential for a significant USD/JPY adjustment once the macroeconomic indicators are in sync. Second, until the BoJ or the Ministry of Finance establishes a credible threshold, the most straightforward approach intraday continues to be to capitalize on Yen strength dips rather than proactively countering the carry.
From a technical perspective, USD/JPY is positioned between a distinctly established support level and a clearly defined resistance level. On the downside, the rebound initiated just pips above a significant support cluster in the 151.91–151.98 zone, where the swing highs from 2022 and 2023 align with the 38.2% retracement of the April advance. The specified area serves as the critical boundary for the sustained upward trend over the long term. A clean weekly close below 151.90–152.00 would indicate the initial significant signal that the multi-year USD/JPY bull phase is experiencing a breakdown. Above that, intermediate support now stands at 154.10 (approximately the 61.8% retracement of the last leg higher) and then around 154.79–155.00, where previous demand has consistently emerged. Provided that pullbacks remain above approximately 154, dip-buyers can maintain that the trend is still in place. On the topside, resistance is positioned from approximately 157.70 to 158.08, characterized by the 2025 high-week close, the December high close, and the January high-week close, with 158.88 representing the critical barrier that bulls have not managed to close above despite several attempts. The earlier blow-off spike towards the 159.00 region also aligned with verbal intervention and “rate check” headlines. The range of 158.88–159.00 continues to be a critical area of focus: a daily and subsequently weekly close above this level would pave the way toward the 160.74–161.95 range (notable high-week close for 2024 and previous swing high cluster), whereas another setback maintains the potential for a more significant pullback toward 154 and subsequently 152.