USD/JPY rebounded from an 11-day low of 152.80 on Wednesday and traded near 153.25. Despite the rise above 153.00, it was still more than 0.7% lower on the day and 2.8% down on the week.
The Yen strengthened after Prime Minister Sanae Takaichi won Sunday’s election. The Nikkei rose to record highs, and the Yen was up nearly 3% against the US Dollar this week.
Dollar Weakened After Retail Sales
US data weighed on the Dollar, with December Retail Sales flat versus a 0.4% forecast. Core retail consumption fell 0.1% in December, and November was revised to 0.2% growth from 0.4%.
Markets are awaiting January’s delayed US Nonfarm Payrolls report. Jobs are expected at 70K versus 50K in December, unemployment is seen steady at 4.4%, and annual wage growth is forecast at 3.6% versus 3.8%.
The Yen’s value is linked to Japan’s economic performance, Bank of Japan policy, bond yield gaps, and broader risk sentiment. The BoJ ran ultra-loose policy from 2013 to 2024 and began moving away from it in 2024, which has supported the Yen.
Looking back at the sharp move in early 2025, we can see that the market reaction to Prime Minister Takaichi’s victory set a new tone for the Yen. That initial surge was a turning point, breaking the old trading ranges and establishing a strong bearish bias for USD/JPY. Today, with the pair trading near 142.50, the trend that began a year ago remains firmly in place.
Central Bank Divergence Drives Trend
The key driver has been the Bank of Japan’s policy shift, which was only a whisper in 2025 but is now a reality. We’ve seen two small but significant interest rate hikes from the BoJ over the last year as inflation has proven sticky, holding at 2.5% according to last month’s data. This policy tightening continues to narrow the gap with interest rates abroad, giving fundamental support to the Yen.
Meanwhile, the economic softness we saw in the US data from late 2024 and early 2025 prompted the Federal Reserve to begin an easing cycle. The most recent Nonfarm Payrolls report came in at 155,000, missing expectations and confirming that the US economy is not strong enough for the Fed to reconsider its dovish stance. This divergence in central bank policy is the primary force weighing on the dollar.
This has dramatically compressed the yield differential between US and Japanese 10-year bonds, a key metric for the pair. While US yields have fallen to around 3.7%, Japanese government bond yields have climbed to over 1.0%, the tightest spread we have seen in years. This makes holding yen relatively more attractive than it has been for over a decade.
Given this backdrop, we should view any strength in USD/JPY as a selling opportunity. Traders could consider buying put options to position for a move towards the 140.00 level, especially ahead of upcoming inflation data from both countries. The path of least resistance for the pair appears to be lower as long as this central bank policy divergence continues.
