USD/JPY. Price Analysis. Forecast. Concerns Over Interventions Strengthen the Yen

[Ben Graham]

The USD/JPY pair plummeted by more than 300 pips on Friday amid signals of a "review of interest rates" from Japan's Ministry of Finance—excessive yen weakness has heightened speculation of an imminent currency intervention.

Pressure on the exchange rate is exacerbated by the overall weakness of the U.S. dollar, undermined by doubts about the Fed's independence and by President Trump's protectionist trade policies, despite the easing of trade tensions between the U.S. and the EU. The DXY index, which reflects the dollar's performance against a basket of six major currencies, fell on Friday, hitting a four-month low. As expected, following the two-day monetary policy meeting that ended on Friday, the Bank of Japan left the short-term interest rate at 0.75% while revising its median real GDP forecast upward to 0.9%.

For the core consumer price index (CPI), the forecast for 2026 was raised to 1.9% from 1.8%, while the forecast for 2027 was maintained at 2.0%.

Fresh data confirm a slowdown in inflation: in December, the year-on-year increase in the consumer price index was 2.1%, down from 2.9%, while the core CPI excluding fresh food decreased to 2.4% from 3.0%.

The national CPI excluding fresh food and energy slowed to 2.9% from 3.0%, remaining significantly above the Bank of Japan's target level of 2%. These figures reinforce market expectations of continued central bank tightening.

Additional positive news came from the real sector: a private-sector survey showed manufacturing activity expanded in January for the first time in seven months. The preliminary PMI for the manufacturing sector from S&P Global jumped to 51.5—the highest since August 2024—while the services sector improved to 52.8 from 51.1.

The political agenda adds uncertainty: Prime Minister Sanae Takaichi will dissolve Parliament on Friday in preparation for early elections on February 8, seeking to strengthen the mandate for fiscal stimulus. However, the idea of a temporary 2-year reduction in the 8% food consumption tax has met skepticism from investors, triggering a sell-off in government bonds and additional pressure on the yen.

The geopolitical backdrop is also not favorable for the yen as a safe-haven asset: following President Trump's Wednesday statement on a possible Greenland deal with NATO, tensions decreased. Meanwhile, the Bank of Japan's hawkish rhetoric contrasts with expectations of two Fed rate cuts this year, and the global trend of dedollarization is weakening the U.S. dollar—the optimistic data from Thursday has been negated.

From the perspective of the Japanese yen against the U.S. dollar, the Bank of Japan emphasized the low level of real interest rates and confirmed its intention to tighten monetary policy by raising interest rates.

Market focus is shifting to the FOMC meeting on January 27-28, where rates are likely to remain in the 3.50%-3.75% range. However, expectations of two Fed rate cuts by the end of the year continue to exert pressure on the U.S. dollar.

From a technical standpoint, prices have dropped below the round level of 156.00, which will now serve as resistance. The relative strength index has moved into negative territory, confirming the bears' strength.

Nevertheless, the pair may correct to 156.50, where the 50-day SMA is located. There is also a possibility of a correction close to the round level of 157.00. However, with such a decline, the pair's path of least resistance is downward.

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