USD/JPY Price Outlook: Key Levels, BoJ, and Political Risks

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The recent USD/JPY price action has been characterized by a significant pullback, registering heavy losses for the first time in three weeks after encountering strong resistance near the psychological 150.00 mark.

The immediate downward momentum is predominantly driven by external headwinds weighing heavily on the US Dollar. These factors include downbeat US labor data, volatility associated with a potential US government shutdown, and a general risk-on mood among investors.

The resulting anticipation of Federal Reserve (Fed) rate cuts in October and December remains "practically intact," compressing the US interest rate advantage and reducing the structural support for the USD leg of the pair.

This weakening of the USD is occurring simultaneously with the emergence of structural drivers for Japanese Yen (JPY) strength. This convergence of fundamental factors, fading USD strength meeting developing JPY appreciation backs the case for a further depreciating move in USD/JPY, suggesting the pair is "not out of the woods yet" for continued downside pressure.

Bank of Japan Policy: Deconstructing the Normalization Path

The Bank of Japan sits at a fork in the road. There are signs of a stronger‑economy which are pushing the BoJ away from its ultra‑easy stance. The internal drivers supporting a policy shift include sustained wage growth, the broadening of services inflation, and upbeat economic activities across Japan.

First, wages have been rising fairly steadily for about a year. Real pay seems to be going up, which could mean households have more cash to spend. That isn’t just a tiny blip; it points to a shift in bargaining power toward workers. When workers earn more, price pressure usually builds.

Second, services‑inflation is spreading. Even though goods prices are cooling, costs for health, hotels and schools keep climbing. Those price rises are likely more permanent because they are tied to personal consumption, not to supply shocks.

Thirdly, recent GDP numbers have been tweaked upward a bit, industrial output beat expectations, and business confidence surveys show a move from fear to hope. All together, these signs show an economy that no longer needs a lot of external stimulus to keep growing.

When you put those three points together, you get inflation that’s driven more by home demand than by foreign price jumps. Governor Kazuo Ueda has said the BoJ will lift rates if the economy and prices match forecasts. He also warned that falling behind inflation “warrants attention.” That sentence, even if a bit vague, signals he sees a risk if they stay too loose.

The recent policy meeting had a surprising 7‑2 split vote. A narrow majority with some hawks on the board is rare when the policy is unchanged. That vote, odd as it is, shows more pressure from inside the central bank that the current stance might become out of step with price movements.

Markets already price that pressure. According to LSEG data, markets are pricing in around a 45.3% probability of a 25 bps hike in December with another 11% pricing in a 50 bps rate cut.

Source: LSEG

Not a done deal yet, but the signs continue to grow.

Japanese Political Risk: LDP Leadership and Monetary Policy Alignment

Over the weekend the Yen may face risk from political developments as the Liberal Democratic Party (LDP) will host their leadership election.

Different candidates have very different money ideas. Sanae Takaichi, who likes stimulus and is against rate hikes, could cause a “political premium” on yen weakness, possibly sparking a sharp USD/JPY jump.

On the other hand, a candidate linked to Shinjiro Koizumi or a neutral one might push for coordinated policy aimed at price stability and growth that could cut uncertainty and maybe push the yen lower against the dollar.

Governor Ueda is scheduled to speak next week Wednesday on October 8. This will come after the LDP leadership contest and it will be interesting to see where the Governor is in terms of rate hikes and any pressure he may face from the incoming LDP leadership.

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Technical Analysis - USD/JPY

From a technical point of view, USD/JPY does appear to have found support at the 100-day MA which rests just above the lower band of the channel which has been in play since the back end of July.

However, significant resistance lies just above current price with the 50 and 200-day MAs resting at 147.80 and 148.24 respectively.

Beyond that we have the psychological 150.00 handle which USD/JPY has twice rejected now. The pair has failed to find acceptance above this handle on August 1 and September 26 2025.

This could be a sign that bears are still interested as the hype around rate hikes from the BoJ builds.

Looking at the downside, support may be found at the 100-day MA and lower end of the range around the 146.50 handle.

Below that we have support resting at 144.84 before the swing low at 143.40 handle comes into focus.

USD/JPY Daily Chart, October 3, 2025

Source: TradingView.com

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