USD/JPY: US-Japan yield spread breakdown signals further yen strength ahead in the near term

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Key takeaways

• USD/JPY reversed from its recent high of 153.28, falling 2.2% as bullish U.S. dollar momentum faded.
• Political uncertainty in Japan weakened the “Takaichi Trade,” reducing bets on extended monetary easing.
• The 10-year U.S.-Japan sovereign yield spread broke below key 2.47% support, signalling further downside pressure.
• Technical indicators point to a short-term bearish setup, with support at 149.05–148.55 and resistance at 151.70.

This is a follow-up analysis and an update of our prior publication, “USD/JPY: Current JPY weakness is driven by short-term sentiment as it disconnects from US-Japan yields”, published on 9 October 2025.

Since our prior report, the USD/JPY has witnessed a minor “momentum crush” as bullish sentiment of the US dollar took a backseat, where the USD/JPY did a residual push up to print an intraday high of 153.28 on 10 October 2025, before it tumbled by 2.2% to hit an intraday low of 149.90 at the time of writing.

In addition, the “Takaichi Trade” of shorting the yen in anticipation of a revival of easy monetary policy in Japan has lost traction as Sanae Takaichi, the newly elected leader of the LDP ruling party, may not receive enough parliamentary votes to become Japan’s next prime minister after the LDP’s long-term coalition partner, Komeito withdrew its 26-year partnership with the LDP.

Let’s now look at several macro and technical factors that suggest further potential downside in the USD/JPY, at least in the near term.

10-year US Treasury/JGB yield spread has (finally) broken below a major support level of 2.47%

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Fig. 1: Yield spreads of US Treasury/JGB with major trend of USD/JPY as of 17 Oct 2025 (Source: TradingView)

The 10-year yield differential between the US Treasury note and JGB has broken below the 2.47% major support with a daily close below it since 8 October 2025 (see Fig. 1)

A move away further down from 2.47% is likely to cement a further narrowing of the 10-year US-Japan sovereign bond yield differential, and a similar movement occurred during late December 2024 to mid-April 2025 that triggered a medium-term decline of 10% on the USD/JPY.

Implied volatility from JPY options has started to tick higher

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Fig. 2: JPY implied volatility as of 7 Oct 2025 (Source: MacroMicro)

The implied volatility of JPY measured via FX options has started to increase from a relatively low level of 8.39 printed on 26 September 2025 (almost a 9-month low) to 9.01 on 7 October 2025 (see Fig. 2)

Prior similar observations seen from 24 January 2025 to 7 February 2025, where the implied volatility of JPY jumped from 8.69 to 10.59, which thereafter led to a fall of 10% on the USD/JPY.

Failure bullish breakout on the USD/JPY

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Fig. 3: USD/JPY medium-term trend as of 17 October 2025 (Source: TradingView)

The recent bullish breakout of the USD/JPY above its “Ascending Wedge” range resistance on 7 October 2025 is considered a “failure bullish breakout” as its latest price actions of the USD/JPY have reintegrated back below the aforementioned range resistance at 150.50.

These observations suggest that the USD/JPY is likely to revert to its medium-term sideways motion, with the key range support to watch at 146.60 (see Fig. 3).

We will now examine its latest short-term (1 to 3 days) trajectory and key technical levels to watch on USD/JPY

Preferred trend bias (1-3 days) – Vulnerable for a bearish break below 20-day MA

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Fig. 4: USD/JPY minor trend as of 17 October 2025 (Source: TradingView)

Bearish bias in any bounces below 151.70 key short-term pivotal resistance, and a break below 149.75 exposes the next intermediate support zone at 149.05/148.55 in the first step (see Fig. 4).

Key elements

• The hourly MACD trend indicator of the USD/JPY has broken below a key ascending trendline support that has occurred below the centreline, which suggests a potential buildup of a bearish momentum condition.
• These observations indicate that the 20-day moving average, which is acting as a near-term support at 149.75, is likely to be broken down.
• The intermediate support zone of 149.05/148.55 is defined by the gap support formed on 6 October 2025 and the 50-day moving average.

Alternative trend bias (1 to 3 days)

A clearance above 151.70 key short-term resistance invalidates the bearish scenario for a squeeze up towards the next intermediate resistance at 152.45.

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