USD/JPY Forecast: Rate repricing hits yen while Nikkei eyes records

• Takaichi headline triggers sharp yen weakness
• Rate hike expectations pushed back, not removed
• USD/JPY tests key topside resistance at 156.25
• Nikkei 225 breakout places record highs in focus

Takaichi headline rattles markets

Japanese markets were jolted late Tuesday after reports surfaced suggesting Prime Minister Sanae Takaichi had conveyed reservations about further interest rate hikes to Bank of Japan Governor Kazuo Ueda during a meeting last week. The headline contrasted with Ueda’s recent description of the discussion as a routine exchange of views, injecting fresh uncertainty into the Bank of Japan policy outlook. With no immediate clarification from government officials, markets moved quickly to reassess expectations, driving volatility across the yen, rates pricing, and equities.

On top of the Takaichi speculation, geopolitical developments did nothing to halt the yen’s slide. China formally announced restrictions on exports of dual-use items and rare earth materials to selected Japanese entities, marking a fresh escalation in tensions between Beijing and Tokyo. The measures follow already strained relations after Takaichi’s visit to the Yasukuni Shrine shortly after taking office, a move that drew criticism from China and other regional neighbours.

Source: Bloomberg

The reported Takaichi request sparked a sharp repricing in near-term rate hike expectations. Pricing for a 25bp increase in March was pared to less than 10%, while April, which was bordering on nearly a lock earlier this month, is now viewed as closer to a coin flip. However, hikes are still being priced in. Swaps markets continue to imply one increase fully priced by July, with a second also pencilled in by December. In effect, the speculation appears to have shifted the expected timing of tightening rather than altering the broader expectation that further hikes will occur.

Source: TradingView

There was also a modest reaction in Japan’s government bond market. Yields on two-year JGBs slid more than 3bps to 1.216%, accompanied by a slight bull steepening of the 2s10s curve. Even so, the adjustment was barely noticeable against the prevailing flattening trend, with fiscal concerns, at least for the moment, fading into the background.

The most pronounced reaction, however, was seen in USD/JPY and Nikkei price action, where the adjustment in rate expectations translated directly into yen weakness and renewed equity market gains.

USD/JPY stalls at critical junction

Source: TradingView

In USD/JPY, the bullish move stalled at an important technical juncture, comprising the 50DMA on the daily and the downtrend from the January 23 swing high, leaving that zone as the clear battleground between bulls and bears. However, with RSI (14) trending higher, signalling building topside pressure, the bias tilts to the upside from a purely technical perspective. MACD also remains in positive territory and is curling back towards the signal line, readying to reinforce the bullish message. Add in the bullish engulfing candle on the daily and the risks of a topside break are hard to ignore.

156.25 remains the level to overcome in order to draw additional bulls back from the sidelines, with little meaningful technical resistance until 157.50 should we see a decisive push through. On the downside, a clean break beneath 155.65 would skew near-term directional risks sideways to lower, placing 155.00 and 154.00 into focus should Tuesday’s move unwind.

Nikkei breakout puts highs in focus

Source: TradingView

The Nikkei 225 no longer appears compressed, breaking cleanly from the bull pennant it had been coiling within. The move places the record highs at 58,570 firmly back in sight. Those considering long positions could look to former resistance at 57,700 as a level to structure setups around, allowing for entry above with a stop below while targeting a retest of the highs. Ideally, a backtest and bounce would provide a cleaner technical entry should one materialise.

If price were to slip back beneath 57,700 and hold there, it would point to a continuation of the rangy trade that dominated prior to the breakout, with offers likely emerging around 57,700 and bids reappearing on dips towards pennant support near 56,000.

Momentum signals lean supportive. RSI (14) has broken its prior downtrend and is pushing further away from the 50 level, while MACD remains in positive territory and is curling back towards the signal line. A crossover would only reinforce the constructive technical backdrop.

Trump wildcard as key catalysts near

Looking ahead, while President Donald Trump’s State of the Union address falls during the Asian session, it remains debatable whether it will carry meaningful market implications. Expect the unexpected with Trump, of course, but having watched countless speeches of this nature over the decades, including four delivered by him, they typically provide plenty of political theatre with limited lasting market impact.

If that pattern holds, aside from a smattering of Federal Reserve speakers and second-tier economic data, the calendar offers little that is likely to materially influence USD/JPY in the near term. Attention instead shifts to Friday’s Tokyo inflation data for February alongside US PPI figures for January, both of which carry clearer implications for rate expectations.

More broadly, the significance of USD/JPY’s latest move should not be overlooked if it proves durable. The combination of a strengthening yen, rising short-dated borrowing costs in Japan and bouts of instability across global asset markets had raised the risk of forced carry trade unwinds. With pressures associated with the first two now arguably less acute, the shift may instead act as a conduit for improving risk sentiment and the performance of risk-sensitive asset classes.