By Rania Gule, Senior Market Analyst at XS.com – MENA
The USD/JPY pair continues its upward trajectory, touching 152.65 in early Asian trading on Friday — its highest level in two weeks — reflecting a clear investor preference for the U.S. dollar amid global economic uncertainty. This rise did not come out of nowhere; it reflects a complex interaction between several economic forces, including monetary policy, inflation trends, and energy prices, in addition to market expectations ahead of the upcoming U.S. and Japanese inflation reports.
In my view as an economist, the current momentum behind the dollar against the yen is not merely a technical move but a reflection of a psychological shift in the markets. Investors are closely awaiting the release of the U.S. Consumer Price Index (CPI) for September, which will serve as a key determinant for the Federal Reserve’s policy direction in the coming weeks.
Expectations point to a 3.1% year-on-year increase in headline inflation — a figure sufficient to keep the Fed’s cautious tone intact but potentially offering the dollar an additional boost if the reading exceeds forecasts. Conversely, if inflation slows unexpectedly, we could see a short-term correction in the dollar against the yen; however, such a pullback would likely remain limited, given the deep divergence between the monetary stances of the Fed and the Bank of Japan.
Japan’s latest inflation data, showing a 2.9% annual rise in the national CPI for September, failed to restore market confidence in the yen. Although the figure came in above the previous 2.7%, it did little to change market perceptions that the Bank of Japan remains far from any meaningful tightening of monetary policy. Market consensus expects the BoJ to maintain ultra-low interest rates in its upcoming meeting, with an extremely slim chance of a 25-basis-point rate hike before year-end. This prolonged accommodative stance continues to be one of the key structural weaknesses weighing on the yen and limits the sustainability of any recovery attempts.
One of the factors that has recently increased pressure on the Japanese currency is the rise in global oil prices following the U.S. announcement of new sanctions on major Russian energy companies, including Rosneft and Lukoil. As one of the world’s largest energy importers, Japan is highly sensitive to higher crude prices, which negatively impact its trade balance and add to domestic inflationary pressures. While rising consumer prices might seem positive in prompting policy review by the BoJ, this “imported inflation” is more of a burden on the Japanese economy than a catalyst for growth. Therefore, I believe the Bank of Japan will continue to exercise extreme caution, favoring patience over risky tightening in a still fragile financial environment.
On the other hand, the U.S. dollar continues to hold its ground as a relatively safe-haven asset amid global uncertainty. Despite ongoing geopolitical tensions and the temporary U.S. government shutdown, the greenback has remained resilient thanks to steady capital inflows seeking both safety and yield. The market now appears convinced that even if the Federal Reserve proceeds with rate cuts in the coming months, it will do so cautiously and gradually — a stance that keeps the dollar attractive compared to low-yielding currencies such as the yen.
The influence of Japan’s fiscal policy cannot be overlooked either. Reports indicate that the newly appointed Prime Minister Sanae Takaichi is preparing a 14 trillion yen fiscal stimulus package aimed at supporting household spending and countering what officials call “inflation fatigue.” Although well-intentioned, such a move could inadvertently add downward pressure on the yen by increasing liquidity in the domestic market, especially if not complemented by tighter monetary measures. In my opinion, sustained fiscal injections without corresponding monetary restraint will make it difficult for the yen to break free from its current downtrend.
Looking ahead, I believe the outlook for the dollar’s trajectory will hinge largely on the outcome of the U.S. inflation report. Should CPI figures exceed 3.1%, markets may reignite speculation about a delay in the anticipated Fed rate cuts, reinforcing the dollar’s short-term gains and potentially pushing USD/JPY beyond the psychological 153 level. However, if inflation surprises to the downside, the pair could retrace slightly, though the move would likely remain capped given the lack of strong bullish catalysts for the yen.
Technically and fundamentally, the broader trend for USD/JPY remains bullish as long as the pair holds above the key 151.80 support level — a psychological zone heavily defended by Japanese institutions. With the yield differential between U.S. and Japanese bonds still wide, there are no clear signs yet of a sustained reversal. Nonetheless, traders should remain alert to possible intervention from Japanese authorities should the pair approach the 153–154 range, which historically serves as an unofficial “red line” for policymakers in Tokyo.
In conclusion, the recent movements in the USD/JPY pair reflect a deep divergence between two economies moving in opposite directions: the United States, seeking to cool inflation without stifling growth, and Japan, striving to stimulate its economy without igniting persistent inflation.
In my opinion, the dollar will remain dominant in the medium term as long as Japan’s monetary policy lacks effective tools for tightening. However, any unexpected shift in the U.S. inflation trajectory could temporarily restore balance. Until then, the pair is likely to remain within an upward channel, driven by yield differentials and the market’s continued preference for the relative safety of the U.S. dollar.