The wide yield spread between the US and Japan, driven by the Fed and the Bank of Japan moving at the same pace, is pushing the USD/JPY higher. However, the pair isn’t rising as quickly as it otherwise might, thanks to an unexpected ally for the yen: the euro. Let’s analyze this situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of Japan is in no hurry to raise interest rates.
- Speculators are closing their long positions on the yen.
- The euro is being used as a funding currency.
- Long positions can be considered with targets of 159.5 and 160.9.
Weekly Fundamental Forecast for Yen
Actions speak louder than words. The market has finally decided what to react to: government rhetoric or objective reality. Sanae Takaichi’s statement that she discussed the strong yen during her meeting with Donald Trump in September failed to temper USD/JPY bulls. On the contrary, the lack of clear signals in the minutes of the Bank of Japan’s latest meeting regarding the continuation of its monetary tightening cycle served as a catalyst for the pair’s rally.
The Board of Governors noted that a renewed acceleration in consumer price growth could provide grounds for stepping up the pace of monetary tightening. In September, the central bank raised its overnight rate from 1% to 1.25%. Yet USD/JPY bears’ expectations that the downtrend that began in October would continue have so far failed to materialize. The futures market currently assigns a 95% probability that borrowing costs will remain at their current level—even as inflation in Tokyo has climbed back above the BoJ’s target. In September, consumer prices accelerated from 1.8% to 2.7%, exceeding the 2.3% increase forecast by Bloomberg economists.
Tokyo CPI YoY
Source: Bloomberg.
Formally, the Bank of Japan has grounds to raise the overnight rate at the end of the month. However, there are risks that an overly rapid tightening cycle could weigh on exports and slow economic growth. The economy is already under pressure from deteriorating terms of trade and rising energy prices.
As a result, the Fed and the BoJ are moving at roughly the same pace, with the futures market pricing in further monetary policy tightening in December. At the same time, the yield spread between US and Japanese bonds is likely to remain wide through the end of the year and beyond, providing room for the USD/JPY to move higher. Speculators have also closed their yen long positions, which they had maintained for two weeks, and have once again shifted into short positions.
Speculative Positions on Japanese Yen
Source: Bloomberg.
At the same time, it would be an exaggeration to say that the USD/JPY is skyrocketing. The pair’s advance has been smooth and gradual, with regular pullbacks along the way. In my view, this is largely due to an unexpected ally of the Japanese yen: the euro.
The euro is lending a helping hand to USD/JPY bears, as it is increasingly being used as a funding currency for carry trades. Indeed, the widening yield spread between French and German bonds, driven by France’s budget problems, has created an attractive opportunity for carry traders.
The yen was previously the preferred funding currency for carry trades. However, the EUR/JPY’s decline to its lowest level since autumn 2025 is prompting speculators to adjust their positioning. As traders close their yen short positions, the selling pressure on the Japanese currency is easing, limiting the upward momentum in the USD/JPY.
Weekly USDJPY Trading Plan
Of course, one could argue that an 80% probability of three Fed rate hikes by September 2027 is overly optimistic. However, as long as the US–Japan bond yield spread remains this wide, the USD/JPY is likely to maintain its upward trajectory. As a result, buy on pullbacks with targets of 159.5 and 160.9.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
