Japanese Yen weakens amid skepticism over BoJ rate increases, fiscal worries, and upbeat risk sentiment

Japanese Yen Weakens Against US Dollar Amid Uncertainty

During Tuesday's Asian trading hours, the Japanese Yen (JPY) slipped against the US Dollar, pausing its rebound from a near two-week low seen the previous day. Despite the Bank of Japan (BoJ) maintaining a hawkish stance, investors remain unsure about when the next interest rate hike might occur. Ongoing fiscal worries and a generally upbeat market mood have weighed on the safe-haven Yen, helping the USD/JPY pair remain steady around the mid-156.00s. However, several factors suggest that traders should be cautious before betting on further declines for the Yen.

Contrasting Central Bank Policies Shape Market Sentiment

Expectations for tighter policy from the BoJ stand in stark contrast to growing speculation that the US Federal Reserve will cut rates further. This divergence could limit gains for the US Dollar and help support the lower-yielding Yen. Additionally, rumors that Japanese officials may intervene to prevent excessive Yen weakness, combined with the possibility of more BoJ tightening, provide some support for the currency. Many traders are likely to wait for Friday’s US Nonfarm Payrolls (NFP) report before making significant moves in the USD/JPY pair.

Mixed Signals Leave Yen Traders Hesitant

• Uncertainty surrounds the BoJ's pace of policy tightening, as expectations for continued low inflation—driven by energy subsidies, stable rice prices, and lower petroleum costs—persist into 2026. Fiscal concerns linked to Prime Minister Sanae Takaichi’s ambitious spending plans have also prevented the Yen from building on Monday’s recovery against the Dollar.
• BoJ Governor Kazuo Ueda stated on Monday that the central bank is prepared to raise rates further if economic and price trends align with forecasts. He emphasized that adjusting monetary support could foster steady growth and that both wages and prices are likely to rise moderately, keeping the door open for additional policy normalization.
• The BoJ’s hawkish outlook has pushed the yield on two-year Japanese government bonds to its highest level since 1996, while the 10-year yield reached a peak not seen since 1999. This narrowing gap between Japanese and global yields may help prevent a sharp drop in the Yen, especially amid speculation of possible government intervention.
• Meanwhile, the US Dollar is under pressure as traders anticipate further policy easing by the Federal Reserve. Market participants are increasingly betting on a rate cut as early as March, with the possibility of another reduction later in the year. These expectations were reinforced by mixed US PMI data released for December 2025.
• The S&P Global US Manufacturing PMI remained steady at 51.8, signaling ongoing expansion. In contrast, the ISM Manufacturing PMI fell to 47.9 from 48.2 in November, indicating continued contraction. This has kept Dollar bulls cautious during Tuesday’s Asian session, limiting upside for the USD/JPY pair.
• Investors are closely watching for Friday’s US Nonfarm Payrolls report, along with other key US economic releases this week, for clues about the Fed’s next moves. These data points will likely influence the Dollar’s direction and could spark renewed momentum in the USD/JPY pair. Despite the uncertainty, the overall backdrop appears to favor the Yen in the near term.

Technical Outlook: USD/JPY Supported by Rising Channel

The USD/JPY pair continues to find support from an upward channel that began at 155.46, with the lower boundary near 156.13 acting as a cushion for pullbacks. Short-term moving averages have leveled off, indicating a period of consolidation within this uptrend. The MACD hovers just above zero, hinting at diminishing bearish momentum, while the RSI stands at a neutral 43, suggesting limited upside without signaling oversold conditions. A decisive move above the channel’s upper boundary at 157.16 could trigger further gains, but failure to attract buyers may see the pair retreat toward the channel’s lower edge.

Note: This technical analysis was generated with the assistance of AI tools.