The USD/JPY pair is currently positioned at approximately ¥155.75, influenced by increasing Japanese yields and a dovish outlook regarding the U.S. dollar. Following a short-lived return to the ¥156.00 level, the pair shifted direction as market participants adjusted their expectations for a Bank of Japan rate increase, while also factoring in a potential Federal Reserve rate reduction in December. The yen’s robustness is attributed to Governor Kazuo Ueda’s comments indicating that Japan’s economic conditions and price trends are conducive to an increase in interest rates, whereas U.S. data has bolstered expectations for monetary easing. Market participants currently estimate an 85% likelihood of a Federal Reserve rate cut on December 17, in light of a significant decline in U.S. Core PCE inflation to 2.4%, marking its lowest point in 2025. The ADP private payroll report indicated the lowest employment growth since 2023, leading to increased selling pressure on the dollar. Given the market’s strong belief in upcoming policy easing, there is a noticeable reluctance among investors to hold long dollar positions prior to the meeting. The recent shift has led to a decline in the U.S. Dollar Index, impacting all major currency pairs such as USD/JPY, EUR/USD, and GBP/USD.
In Japan, the S&P Global Services PMI increased to 53.2, indicating ten straight months of growth and maintaining inflation levels above the 2% target for nineteen months. Increasing wages and surging input costs have strengthened expectations that the BoJ will raise rates this month. Governor Ueda’s recognition that Japan’s growth and inflation forecasts are “gradually being met” has reinforced the market’s confidence. Consequently, yields on Japanese Government Bonds have risen, with the 10-year nearing heights last observed in 2008, thereby intensifying pressure on carry trades and constraining the rebound potential of USD/JPY. The disparity between the BoJ and the Fed has emerged as the prevailing influence in the market. As Japan approaches a phase of policy normalization, the Federal Reserve is taking a contrasting approach. The diminishing yield differential between the U.S. and Japan, which previously served as a significant support for USD/JPY, is declining. Market participants observe that as yields narrow by each percentage point, the attractiveness of speculative long dollar positions diminishes. This structural shift supports the potential for yen appreciation in the medium term. Short-term rebounds are feasible; however, maintaining strength above ¥156.50 appears improbable unless there is an unexpected shift to a more hawkish stance from the Fed.
USD/JPY’s support at ¥155.00 is crucial from a technical perspective. A significant decline beneath this threshold could create opportunities toward ¥153.00 and possibly ¥150.00, where increased buying activity might reappear. On the upside, resistance is positioned around ¥156.50 and ¥157.00, reflecting previous supply zones that were examined in late November. The Relative Strength Index indicates that shorter timeframes are experiencing oversold conditions, while the overall momentum continues to exhibit a bearish trend. Market volume data indicate that rallies are being sold into, consistent with expectations for additional yen strength as we approach the Fed and BoJ meetings. Implied volatility in yen pairs has increased to 9.5%, marking the highest level in over two months, as market participants brace for a busy data calendar — featuring U.S. ISM Services PMI, ADP Employment figures, and discussions surrounding Japanese wage negotiations. These events are expected to influence the short-term trajectory. A weaker U.S. labor report may drive USD/JPY below 155.00, whereas a surprisingly robust jobs report could lead to a brief rally toward 157.00 before sellers regain dominance. Japanese authorities are monitoring yen fluctuations with heightened scrutiny, indicating potential intervention if volatility exceeds the 160.00 threshold.
The current risk assessment indicates a tendency towards yen appreciation. Ongoing inflation exceeding the Bank of Japan’s target, robust wage increases, and tightening domestic conditions stand in stark contrast to the Federal Reserve’s easing trajectory and the weakening economic indicators in the United States. Unless U.S. inflation shows signs of reacceleration or BoJ officials postpone their actions, the USD/JPY exchange rate seems to be leaning towards a decline, with a target of ¥150.00 set for early 2026. Market participants are showing a growing preference for JPY call options and USD put options to take advantage of downside momentum while managing their risk exposure. The current outlook among global desks is predominantly negative for USD/JPY, with any increase surpassing ¥156.50 likely considered a chance to sell.