Japanese Yen Weakens Ahead of Key Central Bank Decisions

• USD/JPY extends its rally for a sixth consecutive day, hovering near a three-week high.
• Market skepticism over the Bank of Japan’s (BoJ) willingness to hike rates continues to pressure the Japanese Yen (JPY).
• Elevated US Treasury yields and expectations of a less dovish Federal Reserve (Fed) support the US Dollar’s strength.

Market Dynamics

1. Bank of Japan Policy Outlook
Investors remain unconvinced that the BoJ will tighten monetary policy further at its meeting this week. While Japan’s economy has shown resilience—evidenced by stronger-than-expected Core Machinery Orders (up 2.1% in October, 5.6% YoY) and improved Manufacturing PMI (49.5 in December, up from 49.0)—the data is unlikely to sway the central bank’s cautious stance.

Despite consumer prices exceeding the BoJ’s 2% inflation target and a modestly expanding economy, doubts persist over whether the BoJ will raise interest rates, keeping the JPY on the defensive.

2. US Dollar and Treasury Yields
The US Dollar benefits from elevated Treasury bond yields as markets price in a 93% chance of a 25 basis point rate cut at the Fed’s December meeting. Signs of stalled progress toward the Fed’s 2% inflation target, however, have tempered expectations of aggressive rate cuts in 2025.

Additionally, geopolitical risks and concerns over US President-elect Donald Trump’s tariff policies could lend some support to the safe-haven JPY, though these factors have yet to trigger a sustained recovery.

3. Mixed Japanese Economic Data

• Services PMI rose to 51.4 in December from 50.5, pushing the composite PMI to 50.8, its highest since November.
• Japan’s Tankan survey reported improved business confidence among large manufacturers.
• Despite this, the JPY struggled to gain traction, weighed down by skepticism surrounding the BoJ’s policy trajectory.

Technical Outlook: USD/JPY

• Upside Potential:
  A sustained break above the 154.00 handle and the 61.8% Fibonacci retracement level of the November-December drop could pave the way for further gains. The next key resistances are located at 154.55 and the 155.00 psychological level.
• Downside Risks:
  Support levels are seen at 153.35-153.30, followed by 153.00. A break below 153.00 could expose the 200-day Simple Moving Average (SMA) near 152.10-152.00. Failure to hold this level may shift momentum in favor of bearish traders, targeting 151.00 and ultimately the 150.00 psychological mark.

Outlook

Traders remain cautious ahead of this week’s critical FOMC and BoJ meetings, which are expected to shape the near-term trajectory of USD/JPY. The pair’s performance will hinge on policy signals from both central banks, with the Fed’s tone on rate cuts and the BoJ’s inflation outlook being pivotal factors.