The Japanese Yen (JPY) trims early Asian-session losses against a broadly weaker US Dollar and looks to extend its rebound from a nearly two-week low. Renewed speculation that Japanese authorities could step in to curb excessive currency weakness, combined with expectations of further Bank of Japan (BoJ) policy tightening, provides support to the Yen.
At the same time, a growing policy divergence between a potentially more hawkish BoJ and a dovish US Federal Reserve (Fed) continues to weigh on the Dollar, offering additional relief to the lower-yielding JPY.
That said, uncertainty over the exact timing of the next BoJ rate hike, along with fiscal concerns and a generally constructive global risk tone, limits the Yen’s upside.
As a result, the USD/JPY pair remains comfortably supported above the 156.00 handle, with traders hesitant to take aggressive positions ahead of key US macroeconomic data later this week, particularly Friday’s Nonfarm Payrolls (NFP) report.
Intervention risks and BoJ outlook underpin the yen
Markets remain divided over the pace and scope of BoJ policy normalization, especially as expectations that energy subsidies, stable rice prices, and subdued petroleum costs could keep inflation contained into 2026 cloud the outlook. In addition, fiscal concerns linked to Prime Minister Sanae Takaichi’s expansive spending plans aimed at stimulating growth continue to act as a drag on the Yen, preventing it from fully capitalizing on Monday’s rebound from a two-week low.
Nevertheless, BoJ Governor Kazuo Ueda reiterated on Monday that the central bank would continue to raise interest rates if economic activity and price trends evolve broadly in line with its projections. Ueda noted that adjusting the degree of monetary accommodation would support sustainable growth and emphasized that wages and prices are likely to rise together at a moderate pace, keeping the door open for further policy normalization.
Rising Japanese yields narrow rate differentials
The increasingly hawkish BoJ narrative has pushed Japanese government bond yields sharply higher. The two-year JGB yield climbed to its highest level since 1996, while the benchmark 10-year yield touched levels last seen in 1999. The resulting narrowing of interest rate differentials between Japan and other major economies could help limit deeper losses in the Yen, particularly amid ongoing speculation about potential government intervention in the FX market.
Dollar pressured by Fed rate cut expectations
On the other side of the pair, the US Dollar remains on the defensive, extending its pullback from a nearly four-week high as markets continue to price in further Fed policy easing. Traders see a strong chance of a rate cut as early as March, with the possibility of another reduction later in the year. These expectations were reinforced by mixed US PMI data for December released on Monday.
While the S&P Global US Manufacturing PMI held steady at 51.8, signaling ongoing expansion, the ISM Manufacturing PMI slipped further into contraction territory, falling to 47.9 from 48.2 in November. The data has kept USD bulls cautious during Tuesday’s Asian session and capped upside momentum in USD/JPY.
Focus shifts to US jobs data
Looking ahead, attention turns to a busy US data calendar, with the Nonfarm Payrolls report on Friday seen as the key catalyst for near-term Dollar direction. The outcome will be closely scrutinized for fresh clues on the Fed’s rate-cut trajectory and is likely to set the tone for the next meaningful move in USD/JPY. For now, the broader fundamental backdrop appears modestly supportive of the Yen.
Technical outlook: USD/JPY consolidates within rising structure
From a technical perspective, USD/JPY continues to trade within an ascending channel originating from the 155.46 area, with the lower boundary near 156.13 offering initial support on dips. Short-term moving averages have flattened, highlighting a phase of consolidation rather than a clear trend reversal.
Momentum indicators suggest limited directional conviction, with the MACD hovering just above the zero line and the RSI near 43, firmly in neutral territory. A sustained break above the channel resistance around 157.16 could trigger a fresh leg higher, while a failure to attract follow-through buying may expose the pair to a pullback toward channel support.
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