USD/JPY Price Forecast - Dollar to yen Slides to 155.60, BOJ Hike Reprice Global Currency Markets

USD/JPY Price Under Pressure as Policy Divergence Between the Fed and BOJ Redefines Global Currency Flows

Fed Dovish Pivot Meets BOJ Tightening Cycle — Yield Differential Narrows Sharply

USD/JPY is trading around 155.60, down from the November peak near 158.88, as global investors recalibrate positions ahead of a December filled with policy shifts. The U.S. Federal Reserve is expected to cut rates by 25 basis points to a range of 3.50%–3.75%, while the Bank of Japan prepares for a possible rate hike to 0.75%, its highest level since 1995. The narrowing yield differential—now just 1.81 percentage points between U.S. and Japanese 10-year bonds—marks the smallest spread in nearly a decade, reshaping carry trade dynamics that have long defined USD/JPY movement.

Japan’s Inflation Pressure and Wage Growth Ignite Monetary Shift

Tokyo’s core CPI rose 3.0% year-over-year in November, remaining above the 2% target for 43 consecutive months. Coupled with average wage growth exceeding 5%, the Bank of Japan now faces inflation driven by domestic demand, not only by import costs. BOJ officials signaled readiness to tighten at the December 18–19 policy meeting, with an 80% market-implied probability of a 0.25% hike. This potential move would push Japan closer to policy normalization after years of ultra-loose conditions and could sustain yen demand into early 2026.

Federal Reserve Turns Dovish as Liquidity Expands and Dollar Weakens

In contrast, the Federal Reserve’s halt of balance sheet reduction and potential rate cut inject fresh liquidity into U.S. markets. M2 money supply rose to $22.3 trillion in November, while expectations for three total cuts in 2025 are priced in. The DXY index remains below 100, reflecting persistent dollar weakness amid falling Treasury yields. The 10-year yield has eased to 3.72%, down from 4.3% earlier in the quarter, reducing demand for dollar-denominated assets. As Fed Chair Powell signals flexibility, USD/JPY remains vulnerable to short-term downward pressure.

Carry Trade Unwinds as Japanese Assets Regain Global Appeal

The yen’s rebound is being driven by the partial unwinding of the $5 trillion USD/JPY carry trade, which had financed global investments in U.S. equities and emerging-market debt. Japan’s rising yields now attract repatriation of capital, with Japanese investors selling $12.7 billion in U.S. Treasuries in November. This reversal, combined with the BOJ’s hawkish stance, strengthens the yen and challenges the long-standing assumption that Japan’s rates will remain near zero. Analysts estimate that if the yield gap falls below 1.5 percentage points, at least $600 billion could flow back into Japanese markets, amplifying yen strength and pressuring USD/JPY toward the 153.00–151.00 zone.

Technical View: Bearish Momentum Deepens, Key Supports in Focus

Technically, USD/JPY has broken its aggressive uptrend line established since October. The pair faces stiff resistance at 157.90 and 158.88, the yearly highs. Immediate support lies at 153.30, aligning with the 50-day moving average, followed by 151.55 and 151.00 as deeper targets if momentum accelerates. The RSI sits near the neutral 50 level, while MACD remains below zero, confirming a bearish bias. Price action below 154.45 could validate further downside, while only a break above 157.90 would restore short-term bullish control.

Market Sentiment and Positioning Ahead of Dual Policy Announcements

Traders are positioning cautiously before the FOMC decision and BOJ meeting, viewing the dual events as pivotal for the yen’s trajectory. The CFTC data shows Japanese net long positions at ¥681,000 contracts, up sharply from ¥70,400 the prior week, reflecting growing speculative demand for yen exposure. U.S. bond auctions for 3-, 10-, and 30-year maturities, alongside the upcoming JOLTS and ADP jobs data, will influence rate expectations. Any surprise dovish signal from the Fed or stronger BOJ tone could trigger an accelerated decline in USD/JPY below the 153 handle.

Macro Backdrop: Divergence Becomes the Core Narrative for USD/JPY

The simultaneous U.S. policy loosening and Japanese tightening create a rare inversion in global monetary alignment. Historically, USD/JPY rises during U.S. tightening cycles; however, the current mix of falling U.S. yields and potential BOJ hikes has reversed that dynamic. Japan’s long-term yields at 1.91% versus 3.72% for U.S. Treasuries have closed to levels unseen since 2015, limiting the appeal of dollar-based carry trades. This environment increases volatility and challenges the notion of structural dollar dominance.

Outlook and Trading Bias — Bearish Trend Confirmed Below 155.00

The near-term bias for USD/JPY remains bearish, as technical, macroeconomic, and positioning factors align in favor of the yen. Sustained trade below 155.00 could trigger momentum toward 153.00, and if breached, extend losses toward 151.00 in early 2026. Conversely, if Fed cuts underwhelm and U.S. yields rebound, USD/JPY could retest 157.90. For now, the combination of yen repatriation flows, a narrowing yield gap, and weakening U.S. fundamentals suggests continued downside pressure.

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