The USD/JPY pair is currently positioned slightly above 156.00, following a pullback from the previous week’s peak of 158.00. The yen strengthened as a result of robust Tokyo CPI figures, increased retail activity, and a boost in industrial production. In November, Tokyo’s headline CPI rose by 2.7% year-on-year, while the core reading remained steady at 2.8%, contrary to forecasts of a decrease. Japanese retail trade experienced a notable increase of 1.7%, exceeding the anticipated 0.8%. Meanwhile, industrial production saw a rise of 1.4%, significantly surpassing the expected decline of -0.6%. The recent figures have reignited discussions regarding a potential 25 basis point rate hike by the Bank of Japan in December or early 2026, contributing to the yen’s appreciation against the dollar. The U.S. dollar continues to show weakness as market participants anticipate significant easing measures from the Federal Reserve. Reports currently indicates an 86.9% likelihood of a rate cut on December 11, projecting the federal funds rate to decrease to 3.75%. The latest data shows that U.S. core PPI increased by only 0.1%, falling short of the anticipated 0.2%. Additionally, retail sales reported a growth of 0.2%, which is below the expected 0.4%. Treasury yields declined to below 4.00% on the 10-year, causing the DXY Index to drop from the 100 range to approximately 99.20. The ongoing contraction in the yield spread between Japan and the U.S. persists in driving demand for the yen while simultaneously diminishing inflows of the dollar.
Although inflationary pressures warrant a tightening approach, the fiscal imbalances in Japan continue to raise concerns. Prime Minister Sanae Takaichi has recently sanctioned a ¥21.3 trillion ($136 billion) stimulus initiative, further contributing to the nation’s unprecedented debt levels. The current expansionary approach constrains the Bank of Japan’s ability to tighten policies, thereby moderating any potential appreciation of the yen. Simultaneously, long-term Japanese Government Bond yields have reached two-decade highs, indicating market stress concerning funding costs. However, BoJ board member Asahi Noguchi indicated that monetary tightening would advance gradually, reinforcing expectations for a slow normalization trajectory rather than a swift succession of increases. The USD/JPY pair remains in a consolidation phase, fluctuating within a tight range of 155.00 to 158.20. On the daily chart, the RSI has declined from overbought conditions exceeding 70 to levels approaching neutrality, indicating a decrease in momentum. The MACD histogram is currently stable near the zero line, indicating a lack of clear direction.
Resistance stands strong at 158.20, representing the annual peak and a significant bullish obstacle for 2025. A breakout above this level may reinstate the long-term uptrend aiming for 160.00. On the downside, immediate support is positioned at 156.00, with further levels at 155.00 and 153.30, corresponding with the 50-day moving average. A sustained break below 155.00 would signify the conclusion of the October rally and could potentially initiate a reversal toward the mid-150 range. The current market dynamics reveal an increasing disparity between the dovish stance of the U.S. and Japan’s careful shift towards a hawkish approach. Market participants are currently reevaluating their positions in anticipation of the Fed’s blackout period, with heightened volatility anticipated as the two central banks diverge in their approaches. Risk sentiment exhibits a mixed outlook: optimism surrounding a potential Russia–Ukraine peace proposal, coupled with weaker U.S. economic data, has bolstered equities while simultaneously diminishing the dollar’s defensive allure. Meanwhile, speculation regarding a more accommodative successor to Fed Chair Jerome Powell has intensified the bearish sentiment surrounding the greenback.
The USD/JPY structure has transitioned from a unilateral rally to a phase of corrective consolidation. Robust macroeconomic indicators from Japan, persistent inflation, and increasing expectations for interest rate hikes are expected to provide support for the yen in the short term, whereas expectations for rate cuts influenced by the Federal Reserve are likely to undermine the dollar. Nevertheless, Japan’s significant fiscal expansion and structural debt risk constrain the yen’s long-term strength. The trajectory of the pair as we approach December hinges on the Bank of Japan’s decision regarding a potential rate hike and the Federal Reserve’s execution of its expected interest rate cut.