USD/JPY: Current JPY weakness is driven by short-term sentiment as it disconnects from US-Japan yields

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Key takeaways

• The Japanese yen has weakened sharply, losing 3.7% against the USD as markets priced in pro-stimulus expectations from new LDP leader Sanae Takaichi, fuelling the “Takaichi Trade.”
• Despite short-term JPY weakness, Japan’s consumer confidence continues to improve, supporting the Bank of Japan’s (BoJ) gradual rate hike stance.
• The BoJ’s policy rate curve remains upward trending, signalling gradual monetary tightening into 2026.
• The US–Japan 10-year yield spread has broken (intraday) below key support at 2.47%, a potential signal for medium-term USD/JPY weakness ahead.

In the past three sessions since Monday, 6 October 2025, the Japanese yen has weakened significantly as it shed -3.7% against the US dollar at the time of writing to print an intraday high of 153.00 on Wednesday, 8 October 2025 after the weekend election of fiscal and monetary dove Sanae Takaichi as the leader of the LDP ruling party in Japan and is likely to become Japan's new prime minister.

The USD/JPY shot past the 150.00 psychological level and printed a current intraday level of 152.94 as the prospects of a 25 basis points interest rate hike by the Bank of Japan (BoJ) in Q4 2025 have dampened, triggered by the “Takaichi Trade”.

Given that Takaichi is a protégée of the late former Prime Minister Shinzo Abe, the market chatter of “Abenomics 2.0” has gained traction, where the new Japanese PM may “push” the Bank of Japan (BoJ) to revert to monetary policy easing and put a pause to its current monetary policy normalisation stance of gradually increasing interest rates in Japan.

In this article, we will highlight three fundamental macro factors that suggest the current JPY weakness is likely not sustainable in the medium term and provide a short-term (1 to 3 days) outlook on the USD/JPY from a technical analysis perspective.

Japan’s consumer confidence continues to improve

Fig. 1: Japan core-core CPI, Average Cash Earnings, Tankan Survey, Consumer Confidence as of Sep 2025 (Source: MacroMicro)

One of the key economic data points, other than the inflation trend, that the BoJ monitors to determine and set the path of monetary policy in Japan, is consumer sentiment.

The latest Japanese consumer confidence index, released last week, rose to 35.3 in September 2025 from 34.9 in August, hitting its highest level since December 2024 (see Fig. 1).

A further improvement in consumer sentiment is likely to boost domestic demand in Japan, in turn, supporting the BoJ’s current monetary policy stance of a gradual rise in interest rates from the current level of 0.5%.

BoJ remains on its path of interest rate hikes

Fig. 2: Japan's implied policy rate curves as of 8 October 2025 (Source: MacroMicro)

Based on the latest data from the short-term interest rate futures market, the current policy rate curve has continued to trend upwards heading into next year (0.62% in December 2025 to 0.95% in September 2025) (see Fig. 2).

Also, the current policy rate curve has shifted upwards from a month ago.

The 10-year US Treasury/JGB yield spread has broken below a major support level on an intraday basis

Fig. 3: Yield spreads of US Treasury/JGB with major trend of USD/JPY as of 9 Oct 2025 (Source: TradingView)

The 10-year yield spread between the US Treasury note and JGB has broken below the 2.47% major support after it managed to trade above it for the entire month of September 2025. Right now, it is still trading at an intraday level of 2.43% at the time of writing (see Fig. 3).

A weekly close below 2.47% is likely to cement a further narrowing of the 10-year US-Japan yield differential, and such a dynamic managed to trigger a medium-term decline in the USD/JPY from late December 2024 to mid-April 2025.

Let’s now focus on the latest short-term trajectory (1 to 3 days), relevant key elements, and key levels to watch on the USD/JPY.

Fig. 4: USD/JPY minor trend as of 9 October 2025 (Source: TradingView)

Fig. 5: USD/JPY medium-term trend as of 9 October 2025 (Source: TradingView)

Preferred trend bias (1-3 days)

Potential squeezed up for USD/JPY towards a major resistance. Bullish bias in any minor setbacks above 151.15 key short-term pivotal support for the next intermediate resistance to come in at 153.65/153.90 before the major resistance of 154.50 (also a Fibonacci extension) (see Fig. 4).

Key elements

• The USD/JPY has broken above the “Ascending Wedge” range resistance on Monday, 6 October 2025 now turns into a pull-back support at 150.50 (see Fig. 5).
• The major descending trendline of the USD/JPY in place since the 3 July 2024 swing high is now acting as a major resistance at 154.50 (see Fig. 5).
• The hourly RSI momentum indicator of the USD/JPY has exited from its overbought level and has not reached its oversold zone (below 30). These observations suggest a potential minor pull-back for the USD/JPY before a bullish move materializes (see Fig. 4).

Alternative trend bias (1 to 3 days)

A break below 151.15 key short-term support negates the bullish tone for a slide towards the next intermediate supports at 150.50 and 149.80.

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