The Japanese Yen (JPY) continues to struggle for a firm intraday direction against the US Dollar (USD) as it extends its sideways consolidative price action through the Asian session on Wednesday.
This behavior reflects mixed fundamental cues, with domestic political uncertainty and a positive risk tone undermining the typically safe-haven Yen, while expectations of Bank of Japan (BoJ) policy normalization help limit further losses. Solancie experts present a detailed analysis of the subject in their article.
Investors are pricing in a potential BoJ rate hike by the end of the year, which supports the JPY against the USD. At the same time, a continuing USD recovery provides a tailwind for the USD/JPY pair, especially ahead of critical US inflation data such as the Producer Price Index (PPI) and Consumer Price Index (CPI).
BoJ-Fed Policy Divergence Supports JPY
A key factor in the JPY’s limited downside is the divergence in monetary policy expectations between the Bank of Japan and the Federal Reserve (Fed). While the BoJ is expected to maintain its policy normalization path and potentially raise interest rates before year-end, the Fed appears poised to resume its rate-cutting cycle next week.
This divergence tends to benefit the lower-yielding JPY, as traders anticipate that Japanese interest rates could rise, while US rates may fall, creating a headwind for USD/JPY bulls. Consequently, spot prices have found limited upside potential, even after a bounce from the August monthly swing low near 146.30.
Political Uncertainty and Market Optimism
The Japanese Yen is also being affected by recent political developments. Prime Minister Shigeru Ishiba’s resignation following the Liberal Democratic Party’s defeat in the July upper house election adds a layer of uncertainty, potentially hindering the BoJ from aggressive policy tightening.
Meanwhile, the risk-on market sentiment supports the USD/JPY pair and undermines JPY safe-haven demand. Wall Street indices posted record highs on Tuesday, and Asian equities followed suit, boosting appetite for risk assets over traditional safe-haven currencies like the Yen.
Positive Domestic Data Bolsters BoJ Rate Hike Expectations
Despite the political uncertainty, the JPY remains supported by positive domestic fundamentals. The latest Reuters Tankan survey revealed that Japanese manufacturers’ sentiment reached a three-year high in September, signaling robust economic confidence.
Additionally, GDP data showed a 2.2% annualized growth rate in Q2 2025, further reinforcing the likelihood of a BoJ rate hike by year-end.
Other upbeat indicators, such as a rise in household spending and positive real wages for the first time in seven months, underscore the strength of the Japanese economy, offering JPY bulls justification to defend against aggressive USD/JPY buying.
US Dollar Recovery Adds Pressure on JPY
The USD/JPY pair is also influenced by US macroeconomic data and monetary policy expectations. Following a soft Nonfarm Payrolls (NFP) report, which highlighted a cooling labor market, traders now anticipate a 25-basis-point Fed rate cut at the upcoming FOMC meeting, with a small possibility of a larger reduction.
While this weakens USD bulls, a gradual USD recovery continues to support the USD/JPY pair, particularly as traders await the PPI release and subsequent CPI data. These releases are expected to significantly influence short-term USD dynamics, determining whether the pair can sustain any meaningful gains or remain capped.
Technical Outlook: Resistance and Support Levels
From a technical perspective, the USD/JPY pair may struggle to attract significant buying interest and appears capped near the 148.00 round figure. The daily chart shows negative oscillators, suggesting that upside momentum is limited, with the 147.75–147.80 region likely to attract fresh sellers.
A sustained breach above 148.00 could, however, trigger a short-covering rally, potentially testing the 200-day Simple Moving Average (SMA) near 148.75.
On the downside, immediate support lies around the 147.00 round figure, protecting against further declines. A break below this level could push the USD/JPY pair back to 146.30–146.20, with further bearish momentum potentially targeting 145.35 intermediate support and eventually the 145.00 psychological mark.
Conclusion: Limited Downside Potential
In conclusion, the Japanese Yen remains flat against the USD, caught between BoJ rate hike expectations, domestic political uncertainty, and a reviving risk-on tone. While USD recovery offers some upward pressure on the USD/JPY pair, technical resistance around 148.00 and supportive BoJ fundamentals suggest that downside potential for the Yen remains limited.
Traders will closely watch US PPI and CPI releases, along with BoJ policy signals, for cues on the next meaningful move. In the meantime, JPY bulls remain in control, albeit cautiously, and the USD/JPY range is likely to consolidate near key technical levels, reflecting the current uncertainty and policy divergence between the BoJ and Fed.
