USD/JPY forecast: Forex Friday | January 26, 2025

• USD/JPY forecast: The yen struggles to benefit from a slightly hawkish BoJ as political and fiscal risks dominate agenda
• Japan’s bond market is becoming a growing source of pressure for JPY
• Broader dollar weakness keeping USD/JPY pair steady - for now

 

The USD/JPY, and more noticeably other JPY pairs, have been quite strong in recent months, thanks the ongoing weakness in the yen. The USD/JPY is being pulled in opposite directions. On paper, the Bank of Japan is becoming more confident about growth and inflation, which should support the yen. In reality, political uncertainty and rising Japanese bond yields are undermining that narrative and keeping the USD/JPY forecast tilted to the upside. We may have seen some intervention from MoF post the BoJ meeting as the yen rallied after the initial drop. But the move has been quite contained and nothing’s confirmed.

 

BOJ leaves policy unchanged

 

The BoJ left rates unchanged at 0.75%, striking a slightly more hawkish tone by upgrading both growth and inflation forecasts, and one member dissented by call for a hike. Governor Kazuo Ueda acknowledged that underlying inflation continues to grind higher. That matters because it keeps the door open for further tightening later this year.

 

The USD/JPY saw two-way price movement on the announcement. It initially gained during Ueda’s press conference, before tumbling on potential MoF activity. But the pair has since stabilised.

 

My base case is now a summer rate hike, although Ueda carefully avoided giving any strong forward guidance during his presser. He also declined to comment directly on the yen, focusing instead on inflation dynamics and how FX could influence price stability. In short, the BoJ looks more comfortable with the idea of higher rates, but it is still moving cautiously.

 

Politics and bonds are the real problem for JPY

 

Under normal circumstances, this BoJ meeting might have pushed USD/JPY lower. But Japan’s political and fiscal situation is dominating market psychology.

 

Prime Minister Sanae Takaichi has dissolved the lower house ahead of the 8 February election, injecting some uncertainty into an already fragile fiscal backdrop. If Takaichi secures a strong mandate, investors fear policies that could further strain Japan’s public finances.

 

This concern is already visible in the bond market. The 40-year Japanese government bond yield this week surged to a record high, and overall JGB yields have seen their biggest swings since the original Trump trade war period. Although yields briefly eased, they are pushing higher again, and that is bad news for the yen.

 

Rising yields driven by fiscal risk are very different from rising yields driven by healthy growth. In this case, higher yields are being interpreted as a sign of deteriorating debt dynamics, which makes Japanese assets less attractive and puts pressure on JPY.

 

As long as this bond market story continues, it is difficult for the yen to benefit meaningfully from the BoJ’s slow shift toward tighter policy.

 

Dollar under mild pressure

 

From the dollar side, it has been an interesting week after all the tariff-related volatility. However, volatility has already cooled, and the dollar has remained largely on the back foot, especially against commodity and emerging market currencies. We have also seen record highs for precious metals, which underscore the ongoing “dollar debasement” trade. Here, fears of a more politically influenced Fed is pushing investors towards gold and silver.

 

But against currencies with weak fiscal positions, the dollar stands ready to benefit, including against the yen. Recently we have also seen some strength is US activity data which could still delay Fed rate cuts and give the dollar support against the lower yielding yen.

 

USD/JPY forecast: Near-term upside, medium-term risks

 

Putting it all together, the USD/JPY forecast remains mildly bullish in the near term, mainly due to political risk in Japan, rising JGB yields, and still-resilient US data. The USD/JPY could be heading to 160 heading into the February election.

 

 

The longer term outlook is uncertain but for now it looks like yen is trapped between a central bank that wants to normalise policy and a government that may be making Japan’s fiscal problem worse. Until that tension is resolved, USD/JPY is likely to stay supported, with dips continuing to attract buyers rather than triggering a sustained downtrend. Key support levels such as 155.00 and 157.00 should hold on any short term dips, I reckon, unless there is a big, coordinated FX intervention.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R