USD/JPY
The BoJ represents the other major central bank on a tightening trajectory. Inflation has exceeded the 2% threshold for 44 consecutive months; nevertheless, the BoJ has proceeded with considerable caution in normalising policy, requiring clear evidence of durable resilience in domestic economic activity before acting.
The most recent gross domestic product (GDP) data illustrates the dilemma confronting policymakers. The subdued headline annualised growth of 0.2% in Q4 2025 masks a more concerning dynamic: elevated living costs are suppressing consumer spending as real wage growth trails inflation. Simultaneously, raising rates too aggressively risks placing undue strain on small and medium-sized enterprises. While the negative effects of US tariffs have largely been absorbed, ongoing tensions with China are exerting pressure on Japan’s tourism sector and detracting from net export performance.
Attention is now shifting to Prime Minister Sanae Takaichi’s fiscal agenda after her ruling coalition secured a supermajority in the recent snap general election. Currency markets have partially priced in the proposed ¥122.3 trillion fiscal year 2026 budget and a two-year suspension of the food sales tax — valued at approximately ¥5 trillion. USD/JPY has strengthened from 147.5 to as high as 159.4 since Takaichi assumed leadership of the Liberal Democratic Party, and while the pair has retreated from its peak following suspected government intervention, it remains up 4.1% over that period.
Fundamental analysis on government bond yield differentials and purchasing power parity points to a considerably stronger yen, with fair value estimated well below 125 per dollar. However, given the structural complexities outlined above, yen normalisation is likely to be a gradual, multi-year process.
Technically, USD/JPY appears to be in a consolidation phase following an 18-month high set in January. A death cross between the 20-day and 50-day moving averages (SMAs) presents a near-term bearish signal, with the pair currently testing a critical support zone between 152.1 and 153.3. A sustained break below this zone could open a path toward the 200-day MA at 150.6. Conversely, a decisive close above 156.3 would signal a resumption of yen weakness.
