The fundamental backdrop is shifting in favor of USD/JPY sellers. The BoJ is expected to tighten faster than the Fed, while lower Treasury yields and an unwinding of carry trades should provide further support for the yen. Let’s assess the market outlook and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of Japan kept interest rates unchanged.
- The unwinding of carry trades continues to support the yen.
- The USD/JPY is consolidating ahead of the US midterm elections.
- Short positions can be opened if the price breaks through 157.45 and 157.00.
Weekly Fundamental Forecast for Yen
Kazuo Ueda reiterated his earlier comments that the Bank of Japan would consider raising interest rates at its next policy meeting, echoing remarks he made in July, shortly before the September rate hike. Markets interpreted this as a signal that monetary tightening could resume soon, sending USD/JPY sharply lower. However, investors subsequently viewed the BoJ governor’s comments as less definitive, reducing the implied probability of a December rate hike from 80% to 57%. This shift in expectations caused the yen to give back some of its gains.
The Bank of Japan kept its overnight policy rate unchanged at 1.25%, unexpectedly increased its planned ETF sales to ¥860 billion, and noted that underlying inflation had reached its 2% target. Overall, the central bank’s messaging was perceived as hawkish. Bloomberg expects the overnight rate to reach 2% in 2027, following three rate hikes in December, March, and July. Most economists surveyed by Bloomberg expect the BoJ to resume its monetary tightening cycle before the end of this year.
Forecasts for Timing of BoJ Rate Hikes
Source: Bloomberg.
Given that the Fed is unlikely to raise interest rates more than twice, and that the yen appears undervalued against the US dollar based on the yield differential between US and Japanese bonds, the long-term outlook for the USD/JPY is increasingly bearish.
This view is reinforced by Barclays’ assessment that the US dollar’s appreciation in recent years, combined with fluctuations in central bank interest rates, will lead to greater volatility across G10 currencies. Such conditions create headwinds for carry trades, prompting investors to lock in profits and unwind positions by buying back their funding currencies, with the Japanese yen remaining one of the most popular.
Carry trades depend not only on low market volatility but also on strong global risk appetite. Both conditions have become increasingly difficult to sustain amid the sell-off in artificial intelligence stocks. In addition, political and fiscal uncertainty in countries such as France, where budgetary disputes are creating turmoil, and Brazil, where an unexpected election development has unsettled markets, is weighing on emerging-market assets. The yen stands to benefit from these developments, as well as from declining US Treasury yields.
Inflation in Tokyo
Source: Bloomberg.
As for the Bank of Japan, it is bound to raise interest rates. In October, inflation in Tokyo—a leading indicator for national consumer prices—slowed slightly from 2.7% to 2.6%. Nevertheless, the figure remains above the 2% target, requiring decisive action from Kazuo Ueda.
Weekly USDJPY Trading Plan
Thus, the Bank of Japan’s faster pace of monetary tightening relative to the Fed, the unwinding of carry trades, and growing challenges in emerging markets all point to further downside in the USD/JPY. However, the pair may enter a consolidation phase ahead of the midterm results announcement. A decisive break below the key support levels at 157.45 and 157.00 could offer a selling opportunity.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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