USD/JPY Update: Can the Yen Recover?

The Japanese yen has faced challenging sessions recently, as USD/JPY has developed a bullish streak, gaining more than 2.3% in the short term. This move has favored the U.S. dollar and highlights persistent weakness in the yen. Part of the current buying pressure can be explained by the lack of a clear stance from Japan to counter the sharp depreciation of its currency, along with a stable Federal Reserve, which continues to provide support and confidence to the dollar in the near term. As long as this environment persists, the yen may continue to lose ground, reinforcing upside pressure in USD/JPY over the coming sessions.

Is the Bank of Japan failing to convince markets?

Several sessions have passed since the Bank of Japan’s (BoJ) latest policy decision, and while potential FX interventions were mentioned to contain yen weakness, no concrete plan has been confirmed so far by either the central bank or the Japanese government to reverse this trend in the short term.

At its last meeting, the BoJ kept its policy rate unchanged at 0.75%, reiterating that monetary policy will proceed in a gradual and cautious manner, depending on incoming economic data. Rather than signaling higher rates, the central bank maintained a dovish tone, reinforcing the perception that a neutral-rate environment could persist for longer.

Meanwhile, the neutral stance of the U.S. Federal Reserve has once again drawn market attention. According to CME Group, there is a greater than 77% probability that the Fed will keep interest rates at 3.75% over its next two policy meetings. In addition, policymakers reiterated that U.S. inflation has not yet reached the 2% target, which remains a key factor supporting higher rates for longer.

Together, these dynamics highlight a hesitant Bank of Japan regarding future rate hikes, contrasted with a Federal Reserve unwilling to cut rates. This keeps the interest-rate differential wide and persistent, with the U.S. offering a far more attractive rate (3.75%) compared to Japan (0.75%), adding further pressure on the yen.

Source: TradingEconomics

This rate gap continues to favor the U.S. fixed-income market, making dollar-denominated bonds more attractive to foreign capital. As a result, flows tend to move toward dollar assets rather than yen-denominated instruments, reducing appetite for the Japanese currency and supporting the dollar in the short term.

As long as the BoJ does not adopt a more aggressive stance aimed at narrowing this rate differential, demand for the dollar is likely to remain dominant, keeping the yen under pressure and reinforcing an uptrend in USD/JPY.

 

The dollar remains the main threat

Beyond monetary policy dynamics, the U.S. dollar has shown consistent strength against its major peers in recent sessions. The DXY index, which measures dollar strength, has staged a sustained recovery above the 97 level, signaling a clear improvement in short-term confidence toward the U.S. currency.

Source: TradingEconomics

This renewed dollar strength has become one of the main catalysts behind yen weakness. If the DXY continues to advance and consolidate this recovery, buying pressure in USD/JPY is likely to remain relevant in the coming sessions.

 

USD/JPY Technical Outlook

Source: StoneX, Tradingview

• The bullish trend remains relevant: Since April 2025, USD/JPY has maintained a well-defined bullish trendline. So far, no downside correction has been strong enough to threaten this technical structure. As long as buying pressure continues to dominate, the uptrend may extend over the coming weeks.
   

• RSI: The RSI continues to hover near the neutral 50 level, suggesting a balance between buying and selling forces over the past 14 sessions. This behavior may point to a short-term phase of indecision.
   
• MACD: A similar picture is visible in the MACD, with the histogram holding near the zero line, indicating that short-term moving averages lack clear direction. This reinforces the likelihood of a consolidation phase for USD/JPY in the near term.
   

Key levels:

• 159.173 – Key resistance: This level corresponds to the 2025 highs and represents the main upside barrier. A sustained break above this zone could reinforce the dominant bullish bias and extend the current uptrend.
   
• 156.370 – Nearby barrier: A recent neutral zone, aligned with the 50-period simple moving average. Prolonged price action around this level could favor a short-term sideways range.
   
• 154.419 – Key support: This level marks the nearest recent lows on the chart. A move below this area could briefly restore bearish pressure, though it would still be insufficient to threaten the longer-term bullish structure.
   

Written by Julian Pineda, CFA, CMT – Market Analyst

Follow him on: @julianpineda25