The USD/JPY structure is currently in a phase where macro divergence is expanding at a rate not seen since early 2022. The pair experienced a notable increase, reaching 155.044, marking the highest point in nine months, before concluding the week at 154.52. This development extended its November gain to 0.34%, following a significant 4.2% rise in October. The market is responding to a confluence of factors: diminishing hopes for a December Fed rate cut, a U.S. government reopening that has briefly revived risk appetite, and the Bank of Japan’s ongoing structural limitations in raising rates amid softening economic data. Despite verbal warnings from Tokyo, the action has been accepted as long as the progression remains gradual. The divergence is evident across all timeframes: the U.S. Dollar Index is establishing a long-term base above 98.55, whereas Japan’s currency is constrained by ongoing domestic stagnation and continuous import-price inflation. The adjustment in the Fed’s path is the primary factor propelling the recent increase in USD/JPY. Reports indicating a 63% probability of a 25 basis points cut to only 44%, resulting in an increase in Treasuries and a widening of the yield spread that has supported the USD/JPY rally for the past two years. With U.S. policymakers indicating ongoing inflationary pressures—particularly as tariffs are anticipated to lead to more stable import prices—the likelihood of additional easing is decreasing.
The resumption of U.S. government operations has reinstated transparency regarding forthcoming macroeconomic data, which market participants anticipate will trend towards stronger outcomes influenced by supply-side disruptions. The absence of CPI and retail sales data last week resulted in an information void; however, the market compensated for this with Fed commentary, leading to a stronger dollar and a more definitive breakout in USD/JPY. The macroeconomic landscape in Japan remains favorable, bolstering the upward trajectory of USD/JPY. Q3 GDP is projected to decline by 0.6% quarter-on-quarter, marking a reversal from the prior 0.5% growth as U.S. tariffs start to diminish external demand. Given that Japan’s trade-to-GDP ratio surpasses 45%, even minor disruptions can lead to significant economic repercussions. Private consumption is projected to increase by a mere 0.1%, a decline from the previous 0.4%. This reflects the dual challenges of stagnant household income and significantly higher import costs resulting from the depreciation of the yen. The outcome is a scenario in which the BoJ is discouraged from implementing aggressive rate hikes, even in the face of increasing inflation risks, as a tighter policy would exacerbate existing domestic economic vulnerabilities. The fluctuations in consumption, combined with rising import costs, reinforce the fundamental rationale for a depreciated yen, maintaining a high USD/JPY rate.
Japan’s external data highlights the yen’s susceptibility. Exports are projected to increase by merely 1.1% year-on-year, a significant decline from the previous estimate of 4.2%. Meanwhile, imports are anticipated to decrease by 0.7%, indicating a deterioration in domestic momentum. The decline in both external and internal demand diminishes the likelihood of a December BoJ hike, strengthening the view that any policy adjustment might be deferred until January 2026, contingent on wage and inflation developments. The upcoming inflation report is set to be critical: the core-core index is projected to shift from 3.0% to 3.1%, primarily driven by increasing import costs instead of robust internal demand. The BoJ finds itself in a challenging position—requiring a stronger yen to manage imported inflation, yet lacking the economic growth necessary to support interest rate increases. This contradiction hinders the USD/JPY from establishing medium-term reversals. Japanese authorities have intensified their verbal interventions as USD/JPY surpasses the 155 level, yet their strategy continues to be reactive rather than proactive. CIBC has updated its projection to 156 by year-end, an increase from the previous forecast of 148. The firm emphasizes that the genuine risk of intervention starts at 158, with 160 considered the definitive ceiling. The Ministry of Finance has cautioned against “one-sided” movements; however, it has not taken further action beyond rhetoric, suggesting that the recent weakness of the yen is not considered disorderly.
Technical positioning indicates that the trend is likely to continue. The USD/JPY pair remains positioned above the 50-day and 200-day EMAs, indicating a sustained long-term bullish trend. The inability of the pair to close above 155.044, coupled with its consistent attempts to test that level, indicates a phase of accumulation rather than exhaustion. A move beyond 155.880, the high recorded in February 2025, paves the way for a clear trajectory towards 156.884, the subsequent level of structural resistance. On the downside, 153 stands as the initial point of vulnerability; a breach below this level would reveal the 50-day EMA and ultimately lead to 150, which serves as both a psychological and historical magnet. The recent candlestick pattern—long upside wicks but firm closes—indicates a measured bullish momentum, rather than excessive movement. The upcoming week holds significant importance for USD/JPY in the fourth quarter. Important U.S. factors to consider are ADP employment figures, the postponed CPI release, an increase in jobless claims approaching 262k, and a decline in the S&P Global Services PMI from 54.8 to 54.
The recent softer labor data, combined with a decline in inflation, may pose a temporary challenge to the dollar. Nonetheless, given the anticipated rise in consumer prices due to tariffs and the Federal Reserve’s clear apprehension regarding the persistence of inflation, the likelihood of a dovish surprise appears minimal. Members of the FOMC, such as Williams, Logan, Waller, Cook, Kashkari, Barr, Jefferson, and Goolsbee, will influence market expectations. Any data strength or hawkish tone from these speakers would likely drive USD/JPY higher into the intervention band. A key indicator for the broader trend of USD/JPY is EUR/JPY, which persists in reaching new all-time highs close to the 180 mark. The euro’s strength against the yen, despite the consolidation of EUR/USD, reinforces the notion that the yen continues to be the weakest currency among the G10, irrespective of the dollar’s movements. While USD/JPY paused near 155, EUR/JPY surged higher, indicating that the yen’s weakness is structural rather than specific to the USD. If EUR/JPY retraces from 180, USD/JPY may experience a decline; however, the fundamental weakness of the yen is likely to persist unless there is a significant positive surprise in domestic Japanese data. Future projections remain optimistic. If U.S. inflation strengthens and the Fed reinforces its commitment to tighter policy language, USD/JPY is poised to approach 157, aligning with FXEmpire’s bullish outlook. A breach of 158 would trigger heightened rhetoric from Tokyo; however, actual intervention is more probable around 160 unless there is a significant increase in volatility. On the bearish side, an unexpected contraction in U.S. inflation, along with weak employment figures and softer PMI data, could push USD/JPY back toward 150. However, this scenario would necessitate several weak signals occurring simultaneously, rendering it a low-probability setup given the current macro momentum.