USD/JPY outlook: Can the Yen hold its ground amid Japan’s policy tug-of-war?

Reports indicate that the Japanese yen is struggling to maintain its stability as Japan’s fiscal and monetary priorities diverge in opposite directions. A massive ¥25 trillion stimulus plan from Prime Minister Sanae Takaichi has reignited concerns about inflation and weighed on the currency, while the Bank of Japan’s cautious stance on rate hikes offers little support. The result is a yen pinned near a nine-month low, with the USD/JPY pair hovering around ¥155.

Many say Japan’s policy tug-of-war is tilting decisively against the yen. Unless the government and central bank find common ground, traders may see further weakness - especially if the dollar remains buoyed by a patient but firm Federal Reserve.

What’s driving USD/JPY

The yen’s weakness stems from a widening policy divide inside Japan’s leadership. Prime Minister Takaichi’s administration has revived Abenomics-style stimulus, prioritising fiscal expansion to boost wages and consumer demand.

Lawmakers have proposed a supplementary budget exceeding ¥25 trillion, stoking concerns over rising debt issuance and sending 40-year Japanese government bond yields to record highs.

Meanwhile, the Bank of Japan (BoJ) is caught between political pressure and macroeconomic caution. Inflation, currently around 2.9%, remains above target, yet the prime minister insists on keeping rates low until wage growth - not food or energy costs - drives price stability. 

Governor Kazuo Ueda has hinted at tightening if inflation persists, but uneven growth complicates matters: GDP grew 1.1% year-on-year, yet contracted 0.4% quarter-on-quarter. This tug-of-war has left investors unsure whether Japan’s policies are reflating the economy or eroding its currency.

Why it matters

This internal conflict is redefining how global markets view the yen. Once seen as a safe-haven anchor, it’s now behaving more like a risk currency, moving with rather than against global sentiment. “Japan has added a tumultuous element - they’re a little more wild, a little more volatile,” said Juan Perez of Monex USA. That volatility reflects a new reality: fiscal expansion is now Japan’s dominant narrative, while monetary prudence takes a back seat.

For traders, the risk is that verbal intervention replaces actual action. Finance Minister Satsuki Katayama has expressed concern over the yen’s sharp depreciation, but Tokyo has so far refrained from stepping into the market. Intervention is likely only if USD/JPY breaches ¥156 decisively - a level seen as politically sensitive rather than economically critical by analysts.

Impact across markets

According to reports, the consequences of Japan’s fiscal-monetary split are evident across its bond and currency markets. The yield curve has steepened sharply as investors price in heavier debt issuance, while near-zero short-term rates keep domestic liquidity abundant. This imbalance encourages capital outflows, as investors seek higher yields abroad, further putting downward pressure on the yen.

Across the Pacific, the Federal Reserve’s steadiness has reinforced dollar strength. Officials such as Philip Jefferson and Christopher Waller continue to advocate patience on rate cuts, trimming the probability of a December reduction to around 48%, down from 60% last week (CME FedWatch). 

According to analysts, as long as this interest-rate gap persists, the dollar will remain structurally favoured against the yen, - and any yen rallies will likely prove temporary.

Expert outlook

Analysts see little relief for the yen in the near term. Barclays recommends holding a long position on the dollar against the yen, arguing that Takaichi’s expansionary agenda will suppress domestic yields and maintain downward pressure on the currency. Still, a sustained climb beyond ¥156 could test Tokyo’s resolve and force coordinated intervention.

The next key event is the delayed US Non-Farm Payrolls report, expected to provide fresh insight into labour market conditions. A weaker reading could trigger short-term dollar selling, allowing the yen to recover briefly. Yet without a policy shift in Japan, that reprieve may be short-lived. For now, the yen’s trajectory is dictated less by data and more by the dissonance between fiscal ambition and monetary caution.

USD/JPY technical insight

At the time of writing, USD/JPY is trading around 155.45, extending gains within a price discovery zone as bullish momentum persists. The pair is hugging the upper Bollinger Band, signalling strong buying pressure but also hinting at a possible overextension.

The RSI is climbing toward the overbought region, reinforcing the risk of a short-term pullback or profit-taking. Immediate support lies at 152.96, followed by 146.45, where a breakdown could trigger sell liquidations and accelerate downside movement.

However, as long as prices hold above the middle Bollinger Band and 153.00, the broader uptrend could remain intact, supported by policy divergence between the Federal Reserve and the Bank of Japan.

Key takeaway

Japan’s yen problem isn’t just about markets - it’s about messaging. Expansionary fiscal policy collides with a hesitant central bank, leaving investors unsure which signal to follow. The result is a currency under sustained strain, with verbal intervention doing little to stop the slide. Unless Tokyo finds alignment between stimulus and stability, the yen’s effort to hold its ground may remain more symbolic than successful.