The USD/JPY pair is currently under significant observation around 155.20, having declined from its late-November peak of 158.00, as market participants adjust their positions in anticipation of important central bank announcements from both the U.S. and Japan. The pair has experienced a decline of approximately 0.7% over the last 24 hours, representing its most significant daily decrease since mid-October. The fluctuations arise from fresh hawkish indications from Tokyo and increasing speculation that the Bank of Japan may implement its first rate hike in over ten years during the meeting on December 18–19, while the Federal Reserve appears to be moving towards initiating its first rate cut cycle starting December 9–10. The yield on the 10-year Japanese Government Bond has reached a 17-year peak, while the 2-year JGB hit 1.0%, marking its highest point since 2008, as traders now assign nearly an 80% likelihood to a December rate hike. The 30-year yield reached new highs, indicating the BoJ’s unspoken endorsement of more stringent policy, while Governor Kazuo Ueda warned that delaying tightening could “risk an inflation overshoot,” pushing the yen higher and pressuring the yen-funded carry trade.
The pair’s reversal below 155.75 — a key channel resistance — indicates a shift in market dynamics, as traders depending on inexpensive yen funding now face rising JGB yields that increase the cost of maintaining dollar-long positions. Meanwhile, the U.S. Dollar Index trades near 99.43, up just 0.08%, reflecting modest strength amid rate-cut expectations. Fed funds futures indicate an 88% likelihood of a 25-basis-point reduction in December, with U.S. 10-year Treasury yields around 3.92%, sharply lower than the October peak of 4.88%, narrowing the U.S.-Japan yield gap that long supported USD/JPY’s bullish structure. The most recent ISM Manufacturing PMI declined to 48.2, marking the ninth consecutive month of contraction, as new orders and employment weakened despite a slight uptick in production. Core PCE is expected at 0.2% month-over-month, maintaining dovish sentiment, while ADP payrolls and Challenger job cuts point to a cooling labor market, reinforcing expectations that the Fed has concluded its tightening phase.
The disparity between the two central banks is the primary driver for USD/JPY, as the Federal Reserve’s communication and weakening U.S. indicators point toward easing by early 2026, while the Bank of Japan moves toward normalization. The rate gap — previously over 500 basis points — is rapidly shrinking, with markets anticipating Japan’s policy rate rising from –0.1% to 0% by December and U.S. benchmark rates falling from 5.25% to 5.00%. The diminishing spread removes a structural advantage for the dollar, driving continued downward pressure on USD/JPY into December. From a technical standpoint, USD/JPY remains weak below 155.75 within a descending channel, facing resistance at 156.00 and 156.65–157.00. A daily close beneath 155.00 would signal a trend-line break and set downside targets at 153.00 and 151.00, whereas a move above 156.00 could trigger a rally toward 157.50–158.00, though likely capped without a rebound in U.S. yields. Momentum indicators show mixed signals, with the RSI near 46, slightly bearish, while the Momentum Oscillator sits just above 100, reflecting weakening bullish conviction.
Japanese Finance Minister Satsuki Katayama warned that “erratic swings” in the yen are “not driven by fundamentals,” fueling speculation that Tokyo may intervene if USD/JPY rises beyond 160.00, similar to the 2022 intervention that pushed the pair below 146.00. With inflation above 2% for over three years and wage growth strengthening, Japan now has a stronger basis for defending the yen, especially as domestic demand supports policy normalization. Market sentiment remains cautious, with equities weakening as rising Japanese yields pressure global risk appetite. The Nikkei 225 fell 1.3%, while U.S. technology indices slipped as leveraged positions were reduced. The unwinding of the yen carry trade has disrupted crypto markets and emerging-market debt, both of which benefited from low-cost yen borrowing, while the yen’s 1.1% rebound since Monday aligns with rising global volatility indexes, signaling defensive positioning among traders.
Market participants are closely watching two major events: U.S. Core PCE on December 6 and the BoJ policy statement on December 19, which will clarify the Fed’s near-term stance and potentially redefine the yen’s longer-term trajectory. Wage data, expected mid-month, will be key in Governor Ueda’s policy decisions, while any confirmation of Kevin Hassett as the next Fed Chair — viewed as dovish — could further weaken the dollar. The USD/JPY is currently positioned at 155.20, holding just above critical psychological support, yet fundamentally remains structurally overvalued as conditions shift away from supporting sustained dollar strength. If the BoJ raises rates or signals an imminent hike, the pair may fall toward 151.00 in the near term and potentially 148.00 by early Q1 2026, though a rebound in U.S. yields above 4.2% or a shift in Japanese bond strength could temporarily pause the correction.