USD/JPY Price Forecast: Political Shock and Fed Cut Bets Push Yen Higher

USD/JPY Slips on Political Shock in Tokyo

The resignation of Prime Minister Shigeru Ishiba rattled Japanese markets and injected sharp volatility into USD/JPY. The pair opened the week near 148.25 but quickly slid below 147.50 as traders reassessed the policy backdrop. With Ishiba stepping down only days after negotiating tariff relief from the Trump administration, political instability now collides with speculation on the Bank of Japan’s next steps. The BoJ has been reluctant to normalize rates despite inflation holding above 2%, and the power vacuum in Tokyo provides fresh cover to delay hikes further. The outcome of the LDP leadership race—where Sanae Takaichi, Shinjiro Koizumi, and Yoshimasa Hayashi are frontrunners—will be critical for fiscal direction and bond market stability. Long-dated JGB yields had surged to multi-decade highs last week before easing, but leadership uncertainty risks another wave of selling pressure if fiscal expansion accelerates.

Fed Policy and Weak U.S. Labor Data Weigh on the Dollar

Friday’s payrolls miss, with only 20,000 jobs added and June revised down to a contraction, pressured Treasury yields and triggered bets for at least 75 bps of Fed easing into 2025. That collapse in U.S. labor momentum eroded the dollar’s yield advantage and initially pushed USD/JPY lower. Yet political turmoil in Japan counterbalanced the bearish U.S. impulse, leaving the pair trapped in congestion between the 200-day EMA near 147.90 and the 50-day EMA around 147.20. Traders are now waiting for U.S. CPI and PPI releases later this week, with services inflation the key focus. A strong print in services categories could delay Fed cuts and support a rebound in the dollar, while weaker readings would deepen the bearish case and potentially send USD/JPY back toward 144.40 or even 142.42.

Speculative Positioning on Yen Shows Conflicted Views

Commitment of Traders data reveals large speculators expanding both gross-longs and gross-shorts on the yen, underscoring divided sentiment. Gross-shorts hit a seven-month high, reflecting skepticism about the BoJ’s willingness to tighten. At the same time, asset managers and hedge funds increased longs in anticipation of dollar weakness tied to Fed easing. This push-pull dynamic is why USD/JPY has remained rangebound since early August, despite major swings in U.S. yields. Unless the BoJ signals a firm shift toward normalization—a move now less likely post-Ishiba—the yen’s rally risks stalling if U.S. data stabilizes.

Technical Landscape Keeps Range Intact

Technically, USD/JPY continues to oscillate between 147.20 and 148.00, with failed rallies toward 149.00 proving attractive short entries. RSI above 50 and a bullish MACD crossover hint at modest upside bias, but without a clean break of the 200-day EMA, momentum remains capped. Upside levels to watch include 151.00, 152.40, and 154.80, while support rests at 146.00 followed by 144.40. A decisive break below 144.40 would unwind the April uptrend and put 142.42 in play.

Macro Risks Ahead for USD/JPY

Beyond domestic politics, Japan’s external backdrop complicates the outlook. Tariff concessions from Washington may temporarily support Japan’s exporters, but if the Fed accelerates cuts while Tokyo stalls on rates, the yen could strengthen rapidly. U.S. Treasury auctions this week could also spark volatility if demand weakens, adding to dollar pressure. On the Japanese side, the leadership race could determine whether fiscal spending expands aggressively, which would steepen the JGB curve and paradoxically weaken the yen despite market turmoil. This tug of war leaves USD/JPY in a fragile balance, highly sensitive to both Fed guidance and Tokyo politics.

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