By Linh Tran, Market Analyst at XS.com
The Japanese Yen continues to weaken, reflecting the policy divergence between the Bank of Japan (BoJ) and other major central banks. Following its latest meeting, the BoJ kept its policy rate unchanged at 0.5%. Although Governor Kazuo Ueda signaled that the bank is “ready to adjust” policy if wage growth and inflation continue to rise sustainably, recent data have not been strong enough to justify an immediate change.
In Japan, Q2 2025 GDP grew by +0.5% q/q, exceeding the previous quarter’s +0.1%. This shows a somewhat positive economic picture; however, domestic consumption remains weak, while exports have stagnated amid slowing global demand. The trade balance remains in deficit or near-balance territory. These factors suggest the BoJ is likely to maintain its ultra-loose stance — continuing to put downward pressure on the Yen.
However, medium-term reversal risks are gradually emerging. Japan’s core CPI (excluding fresh food) remains around 2.7% y/y (as of August 2025) — above the BoJ’s 2% target and has stayed above that level for over three years. This raises the likelihood that the BoJ will be forced to consider a rate hike within the next 6–12 months. If data continue to support this trend, the BoJ could raise rates in the first half of 2026. In other words, while the Yen is not set to strengthen immediately, it is entering a phase of “forming a bottom in expectations.”
After the FOMC meeting last night, the Federal Reserve cut rates by 25 bps, bringing the target range down to 3.75–4.00%. However, Chair Jerome Powell emphasized that this does not mark the beginning of an aggressive easing cycle and that the Fed will remain “data-dependent.” Powell also noted that another cut in December should not be assumed. Despite the rate reduction, the U.S.–Japan yield spread (TNX around 4.0%–4.1%) remains wide, continuing to support the USD against the JPY.
This message allowed the U.S. Dollar to recover slightly after a period of consolidation, as markets perceived the Fed’s stance as cautious yet moderately restrictive. The U.S. 10-year Treasury yield remains around 4.3%, far higher than Japanese yields — maintaining a substantial real-yield advantage that continues to underpin USD strength versus JPY.
Moreover, the USD benefits from its status as a “relative safe-haven asset” amid multiple global uncertainties (Russia–Ukraine conflict, Middle East tensions, and particularly U.S.–China relations — where trade conditions are improving but still fragile). Despite the ongoing temporary U.S. government shutdown and a national debt surpassing $38 trillion, the Dollar remains firm thanks to its central role in the global financial system.
Currently, USDJPY is trading not far from its 52-week high near 158.8 (recorded in January 2025). The pair’s structure remains technically bullish, supported by the wide yield differential and continued safe-haven demand for the USD. However, the medium-term outlook is becoming more balanced as the BoJ moves closer to exiting its ultra-loose policy. If the Fed maintains a cautious stance and Japan’s inflation stays above 2%, USDJPY may peak in Q4 2025 and enter a mild correction phase during H1 2026.