USD/JPY climbs as US dollar strengthens, earthquake uncertainty clouds BoJ outlook

USD/JPY is trading near 155.80 on Monday, up roughly 0.30% intraday, supported by a rebound in the US dollar and firming US Treasury yields. Dollar demand has picked up as markets reposition ahead of Wednesday’s pivotal Federal Reserve (Fed) decision, in an environment already rattled by elevated volatility following a powerful earthquake in Japan.

Investors remain largely convinced that the Fed will deliver a 25-basis-point rate cut this week, with probabilities near 86% according to the CME FedWatch tool. However, Chair Jerome Powell’s communication may lean more hawkish to underscore lingering inflation risks. Reuters reports that several analysts expect an unusual number of dissenting voices within the Federal Open Market Committee (FOMC), potentially reducing policy clarity as markets look toward 2026.

US data in focus ahead of Fed decision

With no major US indicators scheduled for Monday, attention now shifts to Tuesday’s ADP Employment Report and JOLTS Job Openings, which could help refine market expectations regarding the pace of labor-market cooling – particularly as November’s Nonfarm Payrolls (NFP) report is not due until next week.

Friday’s Personal Consumption Expenditures (PCE) release confirmed slower-than-desired disinflation, with Core PCE at 2.8% YoY, reinforcing the argument that the Fed may opt for a more cautious approach to next year’s easing cycle.

Yen weakens as Japan assesses earthquake impact

In Japan, market tension intensified after a magnitude-7.6 earthquake struck the country’s northeast. According to Nikkei Asia, tsunami warnings were issued for Hokkaido, Aomori and Iwate. The event immediately pressured Japanese assets, while the Japanese yen (JPY) softened as investors evaluated both the economic fallout and the possibility that the Bank of Japan (BoJ) may delay its anticipated rate hike.

Mixed macro signals complicate BoJ outlook

Japan’s recent macro indicators have added further uncertainty to the policy outlook. Third-quarter Gross Domestic Product (GDP) was revised to an annualized -2.3%, the sharpest contraction since 2023, raising concerns about the economy’s ability to withstand rapid monetary tightening.

Yet nominal wages rose 2.6% in October, sustaining expectations that the BoJ may still opt for a rate hike at its December meeting. Japanese Government Bond (JGB) yields continue to hover near multi-year highs, reflecting shifting sentiment around the BoJ’s policy trajectory.

Outlook

USD/JPY remains caught between two opposing forces: a firmer US dollar supported by rising Treasury yields, and a weakened yen grappling with post-earthquake uncertainty despite ongoing expectations of BoJ tightening. The Fed’s decision on Wednesday – combined with evolving assessments of the earthquake’s economic damage – will likely determine the pair’s next directional bias.