USD/JPY rose about 0.7% on Tuesday to around 155.86, driven by Japanese Yen weakness. Since late January it has traded between about 152.00 and 157.00, after a pullback towards the 153.000 area last week.
Mainichi Shimbun reported that Prime Minister Sanae Takaichi raised concerns about further Bank of Japan rate rises at a 16 February meeting with Governor Kazuo Ueda. Before this report, a Reuters poll showed most economists expected the policy rate to reach 1% by end-June, and markets priced roughly 70% odds of a hike by April.
Policy Uncertainty And Rate Expectations
Inflation excluding fresh food and energy was still 2.6%, but the report increased uncertainty about the timing of tighter policy. The Federal Reserve kept rates at 3.50% to 3.75% in January, and minutes showed several officials discussed possible rate rises if inflation stays above target.
US consumer confidence rose to 91.2 in February, while the expectations index has been below 80 for 13 straight months. The report also referenced new 15% global tariffs following a Supreme Court ruling.
Technically, the pair moved back above the 50-day EMA near 155.30, with the 200-day EMA around 152.70 rising. The January peak was near 159.450; levels cited include 157.00, 158.000, 153.00, and a 152.100 low.
Looking back at the situation in early 2025, we saw a clear signal for a stronger dollar against the yen. The political pressure from Prime Minister Takaichi suggested the Bank of Japan would remain dovish, while the Federal Reserve was still hinting at potential rate hikes. This fundamental divergence was the primary reason USD/JPY pushed toward the upper end of its 152-157 range.
However, Takaichi’s influence only delayed the inevitable, as persistent inflation forced the Bank of Japan’s hand later in the year. With core inflation in Japan stubbornly holding above 2.3% through the third quarter of 2025, the BoJ delivered a widely anticipated 15-basis-point hike in November, shifting its policy rate to 0.25%. This move, though small, signaled that the era of extreme accommodation was firmly over.
Shift In Central Bank Divergence
On the other side of the equation, the Federal Reserve’s hawkish talk from early 2025 faded as US economic data softened. By late 2025, US core PCE inflation had cooled to an annualized rate of 2.5%, and the labor market showed clear signs of loosening with unemployment ticking up to 4.2%. This completely changed the Fed’s tune, shifting market focus from hikes to the timing of the first rate cuts in 2026.
This reversal in central bank policy divergence caused the USD/JPY rally to stall out below the 158.00 level in mid-2025 and begin a steady decline. The wide 152-157 range we saw early last year eventually broke to the downside, with the pair trading much of the past few months between 147 and 151. The dynamics that supported buying the dollar have now fundamentally flipped.
Given this new reality, the strategy for the coming weeks should be to sell into any significant rallies. The area between 152.00 and 153.00, which acted as strong support throughout 2025, should now be viewed as a major resistance zone. We should consider using derivative strategies like buying put options or establishing bear call spreads when the pair approaches this area to capitalize on expected downside.
The market is now pricing in over 75 basis points of Fed cuts by the end of 2026, while expectations for the BoJ are for at least one more small hike this year. Implied volatility for USD/JPY options has fallen from its 2025 peaks, making it cheaper to position for a continued, gradual move lower. The play is no longer about divergence favoring the dollar, but about convergence favoring the yen.
