USD/JPY. Analysis and Forecast

[Ben Graham]

The Japanese yen continues to suffer intraday losses amid uncertainty surrounding the Bank of Japan's interest rate trajectory and an escalation of tensions between China and Japan. These factors, together with the risks of slowing consumer demand while inflation continues to outpace wage growth at the beginning of 2026, outweigh the positive surprise from Japan's household spending data for November. In addition, concerns over Japan's fiscal position and the resilience of equity markets continue to undermine the yen's status as a safe-haven asset.

Nevertheless, market participants are confident that the Bank of Japan will adhere to its policy normalization path. This contrasts with the Federal Reserve's dovish stance and could slow further gains in the U.S. dollar, thereby limiting the downside in the Far Eastern currency. At the same time, speculation about possible government intervention to support the national currency calls for caution before positioning for further upside in USD/JPY ahead of the release of the U.S. Nonfarm Payrolls (NFP) report.

On Friday, Japan's Statistics Bureau reported a recovery in consumer spending following the October decline. Spending jumped 2.9% year over year in November, exceeding forecasts. However, these figures have had little impact on the yen amid the continued decline in real wages. According to official government data released on Thursday, Japan's inflation-adjusted real wages fell for the 11th consecutive month, down 2.8% in November. This indicates that the core trend of wages lagging behind inflation remains unchanged, creating challenges for the Bank of Japan and undermining the yen.

At the same time, China has intensified tensions with Japan by imposing restrictions on exports of rare earth metals and magnets. This move followed comments by the Japanese prime minister regarding Taiwan and posed a threat to supply chains for local manufacturers, further increasing pressure on the currency.

Bank of Japan Governor Kazuo Ueda did not rule out further tightening, stating earlier this week that the bank would continue raising interest rates if the economy and prices evolve in line with forecasts.

Meanwhile, the U.S. dollar is holding on to its two-week gains and has set a new monthly high against the yen. However, its upward potential is limited by expectations of Federal Reserve easing. Particular attention today will be on the release of the NFP report. In addition, there is a possibility of a U.S. rate cut in March and another one by the end of the year, although this will depend on the NFP results.

From a technical perspective, the pair has broken above resistance at 157.30, tested the December high, and moved toward the round 158.00 level. The December high has now become resistance, while 157.30 acts as support. At the same time, oscillators on the daily chart remain positive, confirming a bullish outlook.

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