The Japanese Yen (JPY) is subdued in early European trading on Friday, though selling pressure remains limited as markets continue to price in a more hawkish outlook for the Bank of Japan (BoJ). Expectations that the BoJ could raise rates as early as next week stand in sharp contrast to growing bets on further US Federal Reserve (Fed) rate cuts, keeping the US Dollar (USD) pinned near a two-month low and offering support to the lower-yielding Yen.
At the same time, Prime Minister Sanae Takaichi’s expansive fiscal agenda has heightened concerns over Japan’s already-strained public finances, particularly against a backdrop of sluggish economic growth. This – combined with the broader risk-on tone in global markets – has discouraged aggressive safe-haven buying of the Yen. Even so, the underlying fundamentals continue to favor downside risks for USD/JPY, despite the JPY being on track for modest weekly losses.
BoJ hike expectations grow, but Yen bulls remain cautious
Asian equities advanced on Friday, taking cues from Wall Street’s overnight gains and dampening demand for traditional safe-haven assets. Meanwhile, renewed worries over Japan’s fiscal trajectory, following Prime Minister Takaichi’s reflationary spending push, kept the Yen under mild pressure during Asian hours.
Japan’s Corporate Goods Price Index (CGPI) reading on Wednesday showed inflation holding above historical norms, reinforcing BoJ Governor Kazuo Ueda’s recent assertion that the likelihood of the central bank’s baseline inflation and economic outlook materializing is rising. This supports the case for continued BoJ policy normalization.
Nevertheless, traders appear reluctant to take aggressive positions ahead of the two-day BoJ meeting beginning December 18. Market expectations were further supported by a Reuters report on Friday suggesting the BoJ is likely to maintain its pledge to continue raising rates, with the pace dependent on economic conditions. The report also noted that the BoJ does not plan to release an updated neutral-rate estimate or rely on it as a primary communication tool.
In contrast, the Fed delivered a widely expected 25-basis-point rate cut on Wednesday but projected only one additional cut in 2026. Investors, however, continue to anticipate the possibility of two cuts next year following dovish remarks from Fed Chair Jerome Powell, who warned that the US labor market faces significant downside risks and that the Fed does not want policy tightening to hinder job creation. This has kept the USD near its weakest level in more than two months, acting as a drag on USD/JPY.
With no major US data scheduled for release on Friday, traders will shift their attention to commentary from key FOMC officials later in the day. However, next week’s BoJ meeting remains the dominant catalyst for USD/JPY direction.
USD/JPY technical outlook: 155.00 remains the pivotal support
Momentum on the topside appears capped, with the overnight swing high just above the 156.00 level acting as immediate resistance. A decisive break above this region could trigger short-covering and lift the pair toward the 157.00 area, aligning with the weekly high. Further gains would open the door to the 157.45 intermediate resistance, followed by the November multi-month peak near 158.00.
On the downside, bearish conviction may strengthen if the pair closes below the key 155.00 psychological support. A break beneath this level could expose the monthly low near 154.35, followed by the 154.00 threshold. Sustained weakness below 154.00 would shift the technical bias firmly in favor of sellers, with scope to revisit support at 153.60 and ultimately target sub-152.00 levels.
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