The USD/JPY pair has risen to 157.70, reaching a peak not seen in 10 months, driven by the increasing policy divergence between the Federal Reserve and the Bank of Japan, which continues to bolster demand for the dollar. Market participants adjusted their forecasts for a December Federal Reserve rate cut, shifting from a near-certain outlook to below 30%. This change followed the release of hawkish meeting minutes that underscored policymakers’ commitment to addressing persistent U.S. inflation and stringent labor market conditions. This transition has revitalized the dollar in international markets, as U.S. yields stabilize close to multi-month peaks, whereas Japan’s bond curve continues to be constrained by yield-curve control measures. The yen, having declined approximately 6% since Prime Minister Takaishi’s election, is under ongoing structural pressure due to the expansion of fiscal stimulus and persistently negative real rates. The pair’s ascent indicates a significant imbalance in monetary policy. The Federal Reserve upholds restrictive measures to manage inflation, whereas the BoJ continues to resist normalization even as headline inflation hovers around 3%. The U.S. 10-year Treasury yields remain elevated above 4.35%, in contrast to Japan’s 10-year yield, which hovers around 0.8%, maintaining one of the most significant yield differentials globally. Investors pursuing yield are reallocating into U.S. assets, which is driving ongoing capital inflows that support the rally of USD/JPY. Japan’s decision to maintain its interest rates has solidified the yen’s status as the global funding currency, fostering leveraged carry positions that enhance every dollar increase. Labor data and the Federal Reserve outlook strengthen the supremacy of the dollar.
Market participants are currently anticipating the September nonfarm payrolls report, which has been postponed due to the U.S. government shutdown. Projections indicate an increase of +50,000 jobs, following the addition of 22,000 jobs in August. The unemployment rate is anticipated to hold firm at 4.3%, while average hourly earnings are forecasted to increase by +0.3%. With the cancellation of October’s NFP release, this report serves as the last labor indicator prior to the Fed’s December meeting. Robust employment figures may effectively remove any lingering expectations for rate cuts and propel USD/JPY to new cycle peaks exceeding 158.90, a level not observed since early 2025. The Bank of Japan is encountering increasing domestic pressure as the yen approaches levels that have historically triggered intervention. Officials from the Finance Ministry have issued several verbal warnings, indicating their unease regarding the swift depreciation. Nonetheless, the core policy stays the same — Governor Ueda emphasizes the need for patience, referencing delicate wage dynamics and inconsistent growth. The fiscal spending package in Japan, projected to exceed ¥15 trillion ($100 billion), exacerbates the yen’s depreciation through increased public borrowing without any monetary counterbalance. Market participants anticipate that only a clear policy change or coordinated intervention could mitigate the trend, neither of which seems to be on the horizon. USD/JPY has surpassed its previous rising channel, pushing gains toward 157.70, while the RSI indicates overbought conditions approaching 78, a threshold not reached since June. The action indicates a brief period of fatigue prior to a potential correction. Immediate support is positioned at 156.70, with the subsequent level at 155.00, marking the upper boundary of the previous consolidation range. A continued decline beneath 155.70 may lead to a retracement towards the 153.20–152.00 range, whereas consistent closes above 158.00 would validate a breakout aimed at 158.87 (52-week high) and 159.50. The price action demonstrates robust impulsive movements accompanied by shallow pullbacks, indicative of a trend driven by capital flows rather than mere speculation.
Data indicate that leveraged funds are holding net-long USD/JPY positions close to 135,000 contracts, marking the highest level since 2017. Sovereign and pension funds are persistently reallocating reserves into dollar assets, capitalizing on the benefits of the rate spread. U.S. Treasury inflows from Japan have experienced a 12% increase year-to-date, while outbound FDI from Japanese corporations is on the rise, contributing to an additional supply of yen. These structural flows result in short-term corrections that are shallow and self-correcting, as each dip draws in hedging and carry interest. Exporters based in Tokyo, who typically sell USD/JPY, have reduced their currency conversions due to sluggish domestic demand and increased energy import expenses denominated in dollars. The prevailing sentiment in the market continues to exhibit a singular focus. As global inflation gradually stabilizes, investors perceive the Federal Reserve as lacking immediate motivation to implement easing measures, whereas Japan’s economic vulnerability constrains the Bank of Japan’s options. The depreciation of the yen has resulted in a 9% increase in import prices year-to-date, negatively impacting consumer sentiment. Every time USD/JPY crosses the 157.00 threshold, intervention discussions emerge, but traders perceive these actions as tactical rather than structural. The volatility indices associated with yen pairs are currently low, hovering around 8.5%. This suggests that the market views the risk of intervention as superficial, unless the pair surpasses the 160.00 threshold.
From a structural perspective, USD/JPY operates within a “premium zone,” suggesting a price extension beyond equilibrium. A corrective pullback toward 155.70–156.80 would be a technically sound move, offering buyers an optimal entry zone prior to any breakout attempt. The bullish momentum is sustained as long as daily closes are maintained above 156.00. The optimistic trajectory includes a retest of 156.00, the establishment of a higher low, and a renewed momentum through 158.87 aimed at reaching the target range of 159.50–160.00. The bearish scenario hinges on a rejection near the highs and a significant break below 155.70, which would pave the way toward the support levels of 154.50 and 153.20. The prevailing macroeconomic trends persist in bolstering the dollar’s supremacy. The U.S. Dollar Index is currently positioned around 100.7, indicating a resurgence in strength following the release of the Fed minutes, amidst a backdrop of mixed global risk sentiment. Equity markets demonstrate resilience — the Dow Jones Industrial Average remains above 45,800, while risk hedging via currency markets continues to be a focus.
The yen’s correlation with Treasury yields is currently above 0.81, indicating that any additional increase in U.S. yields could likely drive USD/JPY beyond the 158.90 level. At the same time, commodity imports, particularly LNG and oil, persist in depleting Japan’s current account, constraining the potential for yen recovery despite robust export volumes. Moving ahead, market participants are closely monitoring two key drivers: the U.S. NFP release and possible changes in communication from the BoJ in December. Any indication of rate tolerance from Ueda could trigger short-term yen appreciation; however, in the absence of such signals, the divergence in monetary policy will continue. The 10-year yield spread between the U.S. and Japan is currently approximately 355 basis points, hovering near levels not seen in decades. While that gap remains, macro models indicate that the equilibrium for USD/JPY is projected to be above 156.00. Market participants are currently factoring in a parity level of approximately 160.00 by early 2026, contingent upon the Fed postponing any easing measures until the second quarter. Momentum continues to exhibit a strong bullish trend. The ongoing structural divergence between a data-driven Federal Reserve and a stagnant Bank of Japan continues to support the strength of the dollar. The range between 155.70 and 156.80 serves as the critical accumulation zone for potential re-entries. Provided that U.S. yields maintain their strength and Japanese policy continues to be accommodative, the most favorable trajectory appears to be upward, with a target range of 158.87–160.00. Intervention chatter and overbought signals could impede momentum; however, they are not expected to alter the trend direction unless there is a policy inflection.