A year ago, the yen was also regarded as one of the most favored currencies on Forex. However, the Bank of Japan’s cautious stance and the change of prime minister have turned it into an outsider. Will history repeat itself? Let’s discuss this topic and make a trading plan for the USD/JPY pair.
The article covers the following subjects:
Major Takeaways
- The Bank of Japan will likely increase its overnight rate in December.
- The Fed intends to ease monetary policy.
- The divergence does not support the yen.
- Traders may consider locking in profits on short positions opened at 156.8.
Weekly Fundamental Forecast for Yen
It is not difficult to confuse the Japanese prime minister. However, the markets are not easily deceived. According to Reuters, the Japanese government is expected to accept a rate hike, as Kazuo Ueda has convinced Sanae Takaichi that a weak yen will not lead to a decline in inflation. However, the divergence in monetary policy between the Fed and the Bank of Japan has not affected the upward trend in USD/JPY quotes. Traders sense something amiss, and their suspicions are likely well-founded.
When the futures market shows a 90% likelihood of a Fed rate cut in December and a BoJ rate increase, the US dollar is poised to plummet sharply against the yen. Indeed, this is the case now, but a slow decline in the USD/JPY pair suggests that monetary policy divergence poses many pitfalls. Speculators are in no hurry to liquidate their short positions on the yen, as Tokyo’s sluggishness after tightening monetary policy could turn it from a frontrunner into an underdog.
Market Expectations for BoJ Interest Rate
Source: Bloomberg.
Against this backdrop, UBS has revised its forecast for the USD/JPY pair upward from 152 to 158 by the end of the year, while Bank of America sees the pair at 160 in early 2026. At the same time, Reuters analysts suggest the yen will strengthen against the US dollar due to divergent monetary policies between the Fed and the Bank of Japan. However, the markets have already fallen into this trap once. At the end of 2024, the Japanese currency was also considered strong on Forex, but the BoJ’s slow pace turned it into an outsider until the end of November.
Meanwhile, investors are not frightened by a surge in Japanese bond yields to their highest levels since 2007, nor by the associated capital repatriation. In fact, when adjusted for inflation, the Japanese debt market rates are lower than those of their counterparts. At the same time, lower hedging costs create a tailwind for pension fund investments in other markets.
Hedge Costs for Yen-Based Investors
Source: Bloomberg.
The government is unlikely to continue doing what Kazuo Ueda wants. The Japanese economy contracted by 2.3% in the third quarter. For Sanae Takaichi, this is a compelling argument for expanding fiscal stimulus through bond issuance. As monetary policy becomes tighter, the cost of debt will continue to increase.
The Fed may offer an unpleasant surprise to USD/JPY bears. Jerome Powell’s hawkish rhetoric, coupled with modest rate forecasts after an anticipated rate cut, will strengthen the US dollar. So, is it time to sell the yen?
Weekly USDJPY Trading Plan
Meanwhile, markets are on tenterhooks ahead of the FOMC meeting. If the greenback recovers, traders may consider locking in profits on short positions opened at 156.8 on the USD/JPY pair.
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
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