USD/JPY Price Forecast - Yen Rallies as BoJ Turns Hawkish and Fed Rate Cuts Loom

USD/JPY (Dollar/Yen) Battles Between Policy Shifts and Yield Pressures as 155.00 Becomes Pivotal Zone

The USD/JPY pair trades under heavy scrutiny near 155.20, down from its late-November swing high at 158.00, as investors recalibrate positions ahead of key central-bank decisions in both the U.S. and Japan. The pair has shed nearly 0.7% in the past 24 hours, marking its sharpest daily drop since mid-October. The volatility stems from renewed hawkish signals out of Tokyo and rising speculation that the Bank of Japan (BoJ) could deliver its first rate hike in more than a decade at the December 18–19 meeting, while the Federal Reserve leans toward its first rate cut cycle beginning December 9–10.

Japanese Yields Surge and the Yen Awakens from Multi-Year Weakness

The yield on the 10-year Japanese Government Bond has surged to a 17-year high, while the 2-year JGB touched 1.0%, its highest level since 2008, as traders priced in nearly an 80% probability of a December hike — up from 60% just a week ago. The 30-year yield climbed to fresh records on Tuesday, signaling the BoJ’s implicit acceptance of tighter policy. Governor Kazuo Ueda intensified the move with remarks that the probability of Japan meeting its inflation and wage targets “has risen materially,” warning that delaying tightening could “risk an inflation overshoot.” These comments broke months of dovish ambiguity and sent the yen rallying across major pairs. The resulting surge in Japanese yields is squeezing the long-running yen-funded carry trade, forcing leveraged positions to unwind and pressuring speculative markets globally.

USD/JPY (Dollar/Yen) Faces Carry-Trade Unwind as U.S. Dollar Momentum Fades

The pair’s reversal below 155.75 — a key channel resistance — reflects a clear shift in market dynamics. Traders that had relied on ultra-cheap yen funding are now facing rising JGB yields, making dollar-long positions costlier to maintain. Meanwhile, the U.S. Dollar Index (DXY) trades near 99.43, up just 0.08%, showing limited strength as rate-cut expectations climb. Fed funds futures imply an 88% probability of a 25-basis-point cut in December, while U.S. 10-year Treasury yields hover near 3.92%, far below October’s 4.88% peak. The narrowing yield differential between U.S. and Japan has compressed one of USD/JPY’s most reliable bullish engines.

Macro Data Weakens the Dollar Narrative

The latest ISM Manufacturing PMI fell again to 48.2, the ninth straight contraction, with new orders and employment both softening. Production rose modestly, but demand remains weak. At the same time, the Core PCE Index, the Fed’s preferred inflation gauge, is projected at 0.2% MoM, a mild enough print to keep dovish pressure alive. The slowdown is evident across job metrics too: ADP payrolls are expected flat to slightly negative, and Challenger job cuts could show another rise, underscoring labor-market cooling. Such data adds weight to the argument that the Fed has completed its tightening cycle and may cut rates sooner than previously priced.

BOJ Hawkish Shift Versus Fed Dovish Tilt Redefines the Spread

The divergence between the two central banks is now the defining catalyst for USD/JPY. The Fed’s tone, coupled with softer data, implies easing into early 2026, while the BoJ’s rhetoric hints at normalization. The rate gap — once above 500 basis points — is shrinking fast. Traders now expect Japan to move its policy rate from –0.1% to 0%, possibly by December, while U.S. benchmark rates could fall from 5.25% to 5.00% this month. The narrowing spread effectively removes the structural tailwind for the dollar and sets the stage for continued downside pressure on USD/JPY through December.

Technical Landscape Confirms Downward Bias

Technically, USD/JPY remains vulnerable below the 155.75 threshold. The pair is confined within a descending channel, with immediate resistance near 156.00 and next resistance at 156.65–157.00. A sustained daily close below 155.00 would confirm a trend-line break and open downside targets at 153.00 and 151.00. On the flip side, a rebound above 156.00 could lead to a temporary rally toward 157.50–158.00, but such strength is expected to be capped unless U.S. yields rise again. Momentum oscillators show mixed readings — the RSI hovers near 46, suggesting neutral bias but leaning bearish, while the Momentum Oscillator sits just above the 100 baseline, reflecting fading conviction among bulls.

Japanese Officials Signal Readiness to Intervene

Japanese Finance Minister Satsuki Katayama warned that “erratic swings” in the yen are “not driven by fundamentals,” reinforcing speculation that Tokyo could intervene if USD/JPY resumes its surge beyond 160.00. The Ministry of Finance has historically stepped in near those levels, as seen in 2022 when massive dollar sales briefly pushed the pair back below 146.00. With inflation above 2% for over three years and wage growth accelerating, Tokyo has greater policy justification to defend the yen, especially now that a stronger domestic demand cycle supports rate normalization.

Market Sentiment and Cross-Asset Correlation

Broader market sentiment remains cautious. Equities have softened as rising Japanese yields pressure global risk appetite. The Nikkei 225 retreated 1.3%, while U.S. tech indices saw mild declines as investors reduced leveraged exposure. The unraveling of the yen carry trade has rippled through crypto markets and emerging-market debt, both heavily financed through low-yield yen borrowing. Meanwhile, the yen’s sharp rebound of over 1.1% against the dollar since Monday coincided with a global uptick in volatility indexes, signaling traders’ hedging behavior.

Short-Term Triggers and Event Watch

Markets are laser-focused on two data sets: U.S. Core PCE (Dec 6) and BoJ’s policy statement (Dec 19). The first will clarify the Fed’s near-term policy bias, while the latter could reshape the yen outlook entirely. Wage data from Japan’s spring “Shunto” negotiations, due mid-month, will be critical to Ueda’s calculus. Meanwhile, any confirmation of Kevin Hassett as the new Fed Chair — perceived as dovish — could further weaken the dollar.

Forecast and Verdict

USD/JPY currently trades at 155.20, maintaining a fragile foothold above psychological support. The pair remains structurally overvalued, with fundamentals now turning decisively against sustained dollar strength. If the BoJ delivers even a minor hike or signals one with conviction, the pair could drop toward 151.00 in the short term, and 148.00 by early Q1 2026. Only a surprise rebound in U.S. yields above 4.2% or a reversal in Japanese bond strength could stall this correction.

Verdict: SELL (Bearish Bias) — The balance of forces favors yen appreciation. Hawkish BoJ signals, narrowing rate differentials, and overextended carry trades combine to tilt USD/JPY (Dollar/Yen) decisively lower, with near-term resistance capped at 156.00 and downside targets at 153.00–151.00.

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