The Japanese Yen (JPY) remains on the defensive through the Asian session on Tuesday amid concerns about Japan’s fiscal health on the back of Prime Minister Sanae Takaichi’s aggressive spending and tax cut plans. Apart from this, a generally positive risk tone is seen undermining the safe-haven JPY amid domestic political uncertainty ahead of a snap election on February 8. This, along with a modest US Dollar (USD) uptick, assists the USD/JPY pair in moving away from its lowest level since November 2025, touched on Monday.

However, speculations that Japanese authorities would step in to stem further JPY weakness warrant caution for the JPY bears amid the Bank of Japan’s (BoJ) hawkish stance. The USD, on the other hand, might struggle to lure buyers amid expectations that the Federal Reserve (Fed) will lower borrowing costs two more times this year. This, in turn, warrants some caution before positioning for any meaningful USD/JPY recovery in the near-term as the spotlight remains on the crucial two-day FOMC policy meeting, starting later today.

Japanese Yen bulls remain on the sidelines amid fiscal concerns and political uncertainty

• Japan’s already strained public finances have come under increased scrutiny after Prime Minister Sanae Takaichi’s pledge to suspend sales tax on food items as part of her campaign ahead of a snap lower house election on February 8.
• Nervousness over Japan’s fiscal outlook had been a key factor behind the recent surge in long-dated Japanese government bond (JGBs) yields, which will push up debt servicing costs. This, in turn, caps the upside for the Japanese Yen.
• Data released earlier this Tuesday showed that wholesale inflation in Japan slowed in the year to December. In fact, the Producer Price Index (PPI) climbed 2.4% YoY during the reported month, down from 2.7% rise recorded in November.
• Additional details revealed that Japan’s Corporate Service Price Index rose 2.6% YoY in December compared to 2.7% prior. There was nothing in the data to contradict the Bank of Japan’s rate-hike path, and it does little to influence the JPY.
• In fact, the BoJ raised its economic and inflation forecasts after leaving short-term interest rates unchanged at the end of a two-day meeting last Friday. The central bank also signaled readiness to continue hiking still-low borrowing costs.
• This marks a significant divergence compared to dovish US Federal Reserve expectations, which keeps the US Dollar on the defensive near a four-month low and supports the JPY amid fears of a potential intervention by Japanese authorities.
• Japan’s PM Sanae Takaichi warned on Sunday that officials stand ready to take necessary steps against speculative and highly abnormal market moves following rate checks from Japan’s Ministry of Finance and the New York Fed on Friday.
• Traders, however, seem reluctant to place aggressive directional bets and might opt to move to the sidelines ahead of a two-day FOMC meeting, starting today. The outcome will drive the USD and the USD/JPY pair in the near term.

USD/JPY bearish technical setup might keep a lid on the attempted recovery

The USD/JPY pair showed some resilience below the 100-day Simple Moving Average (SMA) on Monday, though it remains below the 154.75-154.80 horizontal support breakpoint. The Moving Average Convergence Divergence (MACD) histogram extends deeper into negative territory, indicating the MACD line below the Signal line and momentum under pressure below zero. The Relative Strength Index (RSI) sits at 32 (near oversold), suggesting downside could be stretched.

A daily close below the 100-day SMA at 153.81, which supports the USD/JPY pair in the near term, would hand bears more control, while sustained trade above it would keep the bias anchored by the rising SMA. A flattening MACD histogram and a move back toward the zero line would hint at momentum stabilization, and an RSI recovery toward 50 would improve tone; conversely, a drop into sub-30 would risk further weakness.

(The technical analysis of this story was written with the help of an AI tool.)