Written by: Rania Gule, Senior Market Analyst at XS.com – MENA
The volatility has intensified, with the USD/JPY trading at 150.50 this Friday, after Japan’s Consumer Price Index (CPI) data came in higher than expected. This should have provided strong momentum for the yen against the US dollar, but the market didn’t move in the anticipated direction. Instead of seeing a clear drop in the USD/JPY pair, markets witnessed a fierce battle between buying and selling forces, with senior officials in Japan stepping in to calm the pace of the yen’s rise. This scene reflects the complexity of the relationship between the Bank of Japan’s monetary policy and the economic pressures faced by the Japanese government, especially with rising bond yields.
Japanese Finance Minister Katsunobu Kato’s remarks were a shock to the markets, warning that rising bond yields could add further pressure to Japan’s already bloated fiscal position. This warning wasn’t random, as it came at a critical time when Japanese 10-year bond yields reached 1.455%, the highest level since 2009. In my opinion, while some were betting that the Bank of Japan would continue raising interest rates faster to fight inflation, Kato’s remarks brought things back into focus, confirming that the central bank is not completely independent from the Ministry of Finance, which is grappling with unprecedented levels of debt to GDP.
While markets expect the Bank of Japan to raise interest rates in the summer of 2025, investor confidence in this scenario is not fully formed yet. Despite Japan’s GDP growing stronger than expected in the last quarter and hawkish comments from some central bank board members, concerns remain about the Japanese government’s ability to manage rising debt costs if the bank continues tightening its monetary policy. I believe this makes it likely that the Bank of Japan will adopt a more cautious approach, especially if global economic growth slows or signs of inflationary pressure start to decline in the coming months.
Meanwhile, Asian markets were cautiously dealing with the developments in the US economy, with investors particularly focused on the health of the US consumer, a key driver of global demand. Walmart’s disappointing results raised concerns about American consumers’ ability to maintain the same spending pace. In my view, this means any weakness in the US economy could reflect on the dollar, potentially giving the yen a boost.
However, despite this, the US dollar still maintains some support, especially with the Federal Reserve continuing its hawkish stance on monetary policy. Even with expectations that the Fed may cut interest rates later in 2025, strong economic data from the US, including a robust labour market, could prompt it to delay such a decision. As a result, the dollar could benefit from the interest rate differential between the US and Japan, potentially limiting the yen’s upward momentum temporarily.
What is notable here is that USD/JPY movements are not only tied to monetary policies but also to global capital flows and shifts in investor risk appetite. Amid rising trade tensions, especially with US President Donald Trump threatening new tariffs, demand for the yen as a haven has increased. This trend, along with rising Japanese bond yields, pushed the pair towards the critical psychological level of 150.00, the lowest since December. However, any hints from the Federal Reserve about keeping interest rates high for longer could provide support for the US dollar and limit the yen’s continued rise.
I believe that what’s happening in Japanese markets isn’t just short-term moves but reflects a deeper struggle between inflationary forces and the economic constraints facing the government. With strong GDP growth, rising wage expectations, and increasing consumer prices, Japan seems on track for more monetary tightening. However, with such enormous debt levels, any excessive rise in interest rates could lead to a financial crisis that is difficult to control. For this reason, the Bank of Japan may prefer a gradual approach that balances market stability while avoiding exacerbating the debt crisis.
In my view, the most likely scenario is that USD/JPY will continue to oscillate between inflation pressures in Japan and the Fed’s hawkish monetary policy. While the yen’s rise may seem like a logical move given the rising Japanese bond yields, the Bank of Japan’s ability to continue raising rates remains in question. On the other hand, any signals from the Fed about easing its monetary policy could provide further support for the yen, potentially pushing the pair to lower levels.
Thus, the USD/JPY pair may remain in a sensitive zone, where monetary and financial factors intertwine with global geopolitical and economic shifts. The delicate balance between the monetary policies of the Bank of Japan and the Federal Reserve is likely to be the main factor determining the pair’s future direction, with the understanding that any sudden shifts in global markets could lead to unexpected price movements.
Technical Analysis of (USDJPY) Prices:
Based on the technical analysis of the USD/JPY pair in the 4-hour time frame, the price is currently facing resistance at the 151.00 level after breaking it and stabilizing below it, increasing the likelihood of continued downward movement. The next key support lies at the psychological level of 150.00, which is a pivotal point for traders. A break of this level could open the door for further decline towards the 149.60-149.55 area, which represents secondary support. If selling pressure persists, we may see a test of the 149.00 level and then the December 2024 low at 148.65.
On the other hand, the chart clearly shows a head and shoulders pattern, which strengthens the bearish outlook in the short term. Additionally, the oscillators remain in the negative zone, indicating that the selling momentum has not yet reached oversold conditions, meaning that the selling pressure may continue before any upward correction. However, if a corrective rebound occurs, the 150.90-151.00 area, which has turned into resistance, may pose a barrier to any attempts to rise, followed by the 151.40 level.
If the price manages to break the 151.40 resistance, we might see a short-term rally. However, any rise above 152.00 could be seen as a new selling opportunity, as the 152.65 level represents a key pivot point, being the 200-day Simple Moving Average (SMA). A break above this level could invalidate the bearish scenario and push the price towards the 153.00 and 153.68 levels. However, as long as the price remains below 151.00, the most likely path remains downward.
Support levels: 150.00, 149.55, 148.65
Resistance levels: 151.00, 151.40, 152.65