The USD/JPY declined towards ¥153.80 following an earlier peak of ¥154.45, marking an eight-month high this week. The pair experienced a decline of 0.3% on Friday, following the release of new inflation data , which sparked fresh expectations regarding possible market intervention. The decision was made as the Bank of Japan maintained its interest rates at 0.50%, despite rising domestic inflation and indications from political leaders suggesting a significant fiscal expansion under the new Prime Minister Sanae Takaichi. At the same time, the U.S. Dollar Index hovered around 99.80, bolstered by hawkish remarks from the Federal Reserve that momentarily limited the appreciation of the yen. In October, Tokyo’s core consumer price index experienced a year-on-year increase of 2.8%, representing the most significant rise in four months and exceeding the consensus forecast of 2.6%. The broader CPI registered at 2.8%, an increase from 2.5% in September. The consistent increase in Tokyo inflation, a key national metric, strengthens the conjecture that headline inflation may persist above the BoJ’s 2% target through early 2026.
BoJ Governor Kazuo Ueda recognized that “underlying inflation pressures remain strong,” while maintaining a prudent approach regarding additional rate increases. Current market pricing through overnight swaps indicates a 55% likelihood of a 25-basis-point hike in December, an increase from the 50% probability noted earlier this week. Japan’s Finance Minister Satsuki Katayama delivered her most emphatic caution thus far regarding “rapid and one-sided currency moves,” asserting that authorities are “closely monitoring markets with a high sense of urgency.” The statement, following USD/JPY’s rise past ¥154.40, has reignited speculation regarding the potential for the Ministry of Finance to collaborate with the BoJ for direct intervention if the yen approaches ¥155.00–¥156.00. Historically, comparable statements have often foreshadowed intervention, particularly during the October 2022 sell-off when USD/JPY approached ¥151.94. Market participants currently view the ¥155.00 threshold as a critical point for potential policy intervention, particularly in light of rising domestic inflation and increasing political pressure to safeguard consumer purchasing power. The BoJ’s recent policy meeting showcased a 7–2 division among board members, with Naoki Tamura and Hajime Takata pushing for an increase to 0.75%, highlighting an increase in internal disagreement. Despite maintaining an accommodative stance, the bank has revised its quarterly outlook, enhancing both GDP and inflation forecasts through fiscal 2026. It anticipates core inflation to remain above 2% well into March 2027.
This development signifies a nuanced change in policy — the BoJ has shifted its perspective, no longer viewing inflation as a temporary phenomenon. Ueda continues to exercise caution, stating, “We will spend more time assessing wage trends and the impact of higher food and energy costs before deciding the next step.” Market participants interpret this as a strategy to postpone, indicating that any adjustment in rates might now occur in January 2026 instead of December. Prime Minister Sanae Takaichi, Japan’s first female leader, has unveiled an extensive stimulus package surpassing ¥13.9 trillion ($92 billion) aimed at protecting households from escalating costs and ensuring the stability of small businesses. Her “Abenomics-style” fiscal expansion aims to bolster domestic growth; however, it poses a risk of further weakening the yen by increasing the fiscal-monetary divergence with the U.S. The package encompasses direct cash transfers, corporate tax reductions, and infrastructure investments, reflecting the pro-growth strategy of the late Prime Minister Shinzo Abe. For traders, this fiscal push indicates potential short-term downward pressure on the yen unless the BoJ responds with a more accelerated normalization strategy.
As Japanese fundamentals shifted towards a more hawkish stance, developments in U.S. policy contributed to the dollar’s resilience. In light of the Federal Reserve’s recent decision to implement a 25-basis-point rate cut, Chair Jerome Powell underscored that a cut in December is “not a certainty.” The statement reduced dovish expectations, which revealed a decline in the probability of another cut from 91.1% to 66.6% in under a week. The U.S. 10-year Treasury yield has stabilized around 4.37%, which is contributing to a short-term bounce in USD/JPY. Fed officials Lorie Logan, Beth Hammack, and Raphael Bostic are set to address the market later Friday. Any affirmation of Powell’s hawkish stance may lead to increased buying activity above ¥154.30. From a technical perspective, USD/JPY continues to exhibit a well-defined uptrend; however, short-term indicators suggest signs of exhaustion. The pair is positioned significantly above its 21-day moving average at ¥151.85 and the 100-day at ¥148.14, indicating a sustained bullish trend. However, the RSI at 66.2 indicates a mild bearish divergence — prices reached new highs while momentum did not confirm this movement. Immediate resistance is positioned at ¥154.80, with the next level at ¥155.53, representing the cycle high from February. On the downside, ¥153.00 serves as the primary support level, coinciding with the 21-day average. A breach beneath that level may prolong the correction towards ¥151.50–¥152.00, with a significant drop below ¥151.00 shifting the near-term outlook to bearish.
In September, retail sales experienced a month-on-month increase of 0.3%, effectively reversing the 1.1% decline observed in August. This uptick indicates a degree of consumer resilience in the face of ongoing inflationary pressures. Considering that private consumption constitutes 55% of Japan’s GDP, the recovery adds complexity to the BoJ’s dovish stance. The continuation of consumption at these levels may expedite wage negotiations in early 2026, thereby reinforcing the persistence of inflation. The labor market continues to exhibit tight conditions, with unemployment holding steady at 2.6%, indicating that upward wage pressure persists. These conditions increase the probability that the BoJ could encounter a dual challenge: managing inflation while maintaining consumption — a situation that frequently bolsters a stronger yen. Takaichi’s historic leadership has strengthened investor confidence in Japan’s fiscal continuity, yet it has also brought about new uncertainties regarding long-term monetary coordination. The coalition with the Japan Innovation Party is perceived positively by the markets, as it emphasizes pro-business reforms along with a dedication to free secondary education and tax relief. Equity investors have shown a favorable response, as the Nikkei 225 maintains its position above 38,500. However, currency traders are exercising caution, concerned that extended stimulus measures might jeopardize the stability of the yen.
The verbal warnings from the Ministry of Finance indicate that policymakers are keenly aware of the trade-offs involved, especially as USD/JPY approaches intervention thresholds. The expanding policy divergence between the Federal Reserve and the Bank of Japan remains a key factor influencing the direction of USD/JPY. As the Fed indicates a “longer-for-higher” rate environment, Japan’s prudent strategy and fiscal expansion enhance the yield differential, providing ongoing structural support for the dollar. However, with Japanese inflation unexpectedly increasing and intervention threats escalating, traders are now preparing for a short-term correction before the broader uptrend continues. Should the BoJ pivot sooner than anticipated, USD/JPY might revisit ¥151.00; however, maintaining an ultra-loose policy could potentially pave the way towards ¥155.50–¥156.00 by the end of the year. The short-term outlook for USD/JPY has transitioned from strongly bullish to moderately corrective as macroeconomic and technical indicators align. The increase in Tokyo’s inflation to 2.8%, alongside political pressures and the risks associated with verbal interventions, establishes a short-term cap near ¥155.00. However, the Fed’s hawkish stance and Japan’s fiscal expansion hinder a sustained recovery of the yen. Provided that support at ¥153.00 is maintained, the overall trend continues to be bullish, with possible retests of ¥154.80 and ¥155.50 on the horizon. The pair currently holds a strong Hold/Bullish Bias rating, indicating that short-term corrections are probable before a resurgence in upward movement as we approach December.