USD/JPY is trading at 157.35, reflecting a decrease of 0.81 yen, or 0.51%, on Thursday. The pair commenced trading at 158.16, reached a peak of 158.25 during the early hours of the Asian session, and subsequently declined to a low of 157.30. The decline has pushed it beneath 157.65, a support level that had been maintained over the previous week and now serves as resistance. The yen appreciated against all major currencies today, increasing by 0.63% relative to the dollar and by 0.99% in comparison to the euro. The argument of this forecast is that USD/JPY is constrained by two opposing forces that both indicate a downward trajectory for the time being. Above the market, Japan’s Ministry of Finance has explicitly stated that 160 is the threshold it intends to protect. Tokyo acquired ¥11.74 trillion of yen from April 28 to May 27, subsequently executing its first coordinated intervention with Washington since 1998 in late July, following the exchange rate surpassing 160. Below the market, the rate gap that has underpinned the dollar throughout the year is beginning to contract. The 10-year Treasury yield decreased by 11.3 basis points to 5.036% on Thursday, while the Bank of Japan has implemented two rate increases since June, bringing the rate to 1.25%, with an additional hike anticipated by December. Thursday’s movement was influenced by both parties.
On the U.S. side, the AI-driven equity selloff redirected capital into Treasuries, resulting in lower yields and diminishing the dollar’s carry attractiveness. The dollar index declined to 101.45 in Asia, marking a three-week low, before rebounding to 101.85. Recent hawkish comments from senior BoJ officials have bolstered demand for the yen, while its status as a safe haven has drawn buyers amid a decline in global stocks. Japan’s Nikkei 225 experienced a decline of 1.6% overnight, influenced by a significant downturn in Asian chip stocks. The calendar is congested. The Fed is set to make a decision on October 28, with a 16% probability of an interest rate hike next week and a 90% probability by December. The Bank of Japan convenes on October 29–30, with expectations to maintain the rate at 1.25%. Japan’s national inflation data presents an additional challenge for the Bank of Japan’s trajectory. Brent crude at $111.99 poses challenges for Japan’s oil-importing economy, exerting a yen-negative influence that has been somewhat overshadowed this week by yields and haven flows. The levels are distinctly defined. Support is established at 156.90, followed by 156.45, and subsequently at 156.25. Resistance is positioned at 157.65, the previously established support level, followed by 158.25, which marks Thursday’s peak, and 158.64, the high recorded on October 12. The 160 level represents the upper threshold, at which point intervention is expected to be highly probable. The pair has experienced an increase of 3.7% over the past 12 months; however, it has shown no advancement in the last month. The decline on Thursday was primarily influenced by the U.S. bond market. The 10-year Treasury yield decreased by 11.3 basis points, settling at 5.036%, marking a one-month low.
The 30-year declined by 8.4 basis points to 5.353%, while the 5-year decreased by 10.6 basis points to 4.864%. The 10-year has now decreased by approximately 30 basis points from its intraday peak above 5.34% on October 1, marking the highest level since 2002. The USD/JPY exhibits a robust positive correlation with U.S. yields, and a rapid decline in yields typically results in a corresponding movement in the pair. The cause is risk-off. The Nasdaq Composite experienced a decline of 2.06%, while the S&P 500 decreased by 1.08%, driven by a sell-off in stocks associated with Meta, Tesla, and AI-hardware. Meta experienced a decline of 5.95% following the announcement of its inaugural negative free cash flow. Lam Research experienced a decline of 8.4% despite reporting a record quarter. Investors shifted capital from equities to Treasuries, resulting in diminished yields that reduced the dollar’s attractiveness relative to low-yielding currencies such as the yen. French bond stress has contributed to the demand for Treasuries. France’s 10-year yield has surpassed 5% for the first time since 2002, while the French-German spread has expanded beyond 160 basis points. Investors seeking secure government debt acquired U.S. Treasuries and German Bunds. That contributed to the downward pressure on U.S. yields. Global macro investors reduced their long positions in the dollar. The dollar reached 17-month highs at the beginning of October, propelled by expectations of Federal Reserve interest rate hikes and increased demand for safe-haven assets amid the conflict in Iran.
Since then, it has been undergoing a phase of consolidation. Thursday’s three-week low in the dollar index, at 101.45, indicates that consolidation is transitioning into a slight pullback. As long-dollar positions unwind, USD/JPY, a prominent carry trade, experiences a decline. In the short term, U.S. yields serve as the primary catalyst for the forecast. If the 10-year remains under 5.05%, USD/JPY is likely to face challenges in surpassing 158. If yields rebound toward 5.15% to 5.20% on a hawkish Fed or strong data, the pair could test 158.64 again. The rate move provides traders with greater insight into the subsequent day’s trajectory than any developments occurring in Tokyo. The Bank of Japan has adopted a consistent approach to interest rate increases. It remained at 0.75% in March 2026, with board member Hajime Takata expressing dissent in support of an increase to 1.00%. It raised rates to 1.00% in June and to 1.25% in September, marking the highest level in 31 years. Moving three months apart, rather than the previous pace of roughly once every six months, indicated a more accelerated tightening cycle. September’s hike elevated the policy rate into the Bank of Japan’s estimated neutral range of 1.1% to 2.5% for the first time. Governor Kazuo Ueda articulated a shift in the bank’s mission. He stated that the BoJ has entered a new phase, transitioning its emphasis from driving underlying inflation up to 2% to averting any overshoot of that target. On October 16, the bank reaffirmed its commitment to increasing the policy rate in accordance with economic, price, and financial developments, noting that underlying inflation is nearing 2%. Accommodative financial conditions persist in bolstering the economy, despite the increase observed in September.
The October meeting is anticipated to result in no change. The BoJ convenes on October 29–30, with expectations that the bank will maintain its rate at 1.25%. Officials perceive minimal necessity for successive increases in rates absent indications that inflationary threats are escalating significantly. In recent surveys, 83% of economists anticipate the next hike in December, a notable increase from 35% a month prior, with no expectations for a move in October. Two-thirds anticipate that the Bank of Japan will implement rate hikes every three months, with the median projection for the terminal rate standing at 1.75%. The emphasis is placed on the terminology utilised by the bank. Markets are closely observing whether the Bank of Japan will announce that underlying inflation has attained its 2% target. Such a development would indicate further increases in interest rates and bolster the value of the yen. Board votes will also attract scrutiny: Takata, the most hawkish member, may express dissent in favour of consecutive hikes. A dissent would indicate internal pressure within the board for more rapid tightening. For USD/JPY, the Bank of Japan’s trajectory is significant due to the interest rate differential. Each BoJ hike diminishes the disparity between U.S. and Japanese rates, thereby diminishing the attractiveness of borrowing yen to acquire dollars. With the BoJ at 1.25% and moving toward 1.50% in December and 1.75% eventually, the gap is poised to diminish over the coming year. That is a gradual yet consistent influence exerting downward pressure on USD/JPY.
