Japanese Yen underperforms amid fiscal concerns, BoJ decision in focus

The Japanese Yen (JPY) remains depressed against its American counterpart during the Asian session on Friday amid domestic political uncertainty and concerns about Japan’s fiscal health. Apart from this, the prevailing risk-on environment turns out to be another factor that contributes to the safe-haven JPY’s relative underperformance ahead of the crucial Bank of Japan (BoJ) interest rate decision. The central bank is widely expected to maintain the status quo after raising the overnight interest rate in December to 0.75%, or the highest in 30 years.

Meanwhile, the focus will be on BoJ Governor Kazuo Ueda’s remarks during the post-decision press conference, which will be scrutinized for cues about the timing of the next rate hike. Heading into the key central bank event risk, the JPY bears might refrain from placing aggressive bets amid speculations that government authorities might intervene to stem further weakness in the domestic currency. Apart from this, a broadly weaker US Dollar (USD) keeps the USD/JPY pair below a one-week high, around the 159.00 neighborhood, touched on Thursday.

Japanese Yen remains on the back foot amid fiscal concerns and ahead of the BoJ rate decision

• Japan’s Prime Minister Sanae Takaichi will dissolve parliament on Friday ahead of a snap election on February 8, hoping for a stronger mandate to push through her ambitious fiscally expansionary policies.
• Investors, however, gave a thumbs down to Takaichi’s proposal to cut the 8% food consumption tax for two years, which led to a free fall in government bonds and continues to weigh on the Japanese Yen.
• Geopolitical tensions eased dramatically after US President Donald Trump announced on Wednesday a potential deal with NATO involving Greenland, further undermining the JPY’s safe-haven status.
• Data released this Friday showed that Japan’s National Consumer Price Index fell from the 2.9% YoY rate to 2.1% in December, while CPI excluding fresh food arrived at 2.4% compared to the 3.0% in November.
• Additional details revealed that the National CPI excluding fresh food and energy slowed to the 2.9% YoY rate in December from 3.0% in the previous month, though it remains above the Bank of Japan’s 2% target.
• The data reaffirms market expectations of further BoJ policy tightening. Moreover, a private-sector survey showed that Japan’s manufacturing activity expanded in January for the first time in seven months.
• In fact, the S&P Global flash Japan manufacturing PMI rose to 51.5 in January, or its highest level since August 2024. Adding to this, the gauge for the service sector also picked up and rose to 52.8 from 51.1.
• This holds back the JPY bears from placing aggressive bets as the focus remains glued to the outcome of a two-day BoJ policy meeting. Investors will look for cues about the timing of the next rate hike.
• Hence, the spotlight will be on BoJ Governor Kazuo Ueda’s post-decision press conference, which will play a key role in determining the near-term trajectory for the JPY and provide a fresh impetus to the USD/JPY pair.
• Meanwhile, hawkish BoJ expectations mark a significant divergence in comparison to the growing acceptance that the US Federal Reserve will lower borrowing costs at least two more times this year.
• Apart from this, the broader de-dollarization trend offsets Thursday’s upbeat US data and dragged the US Dollar back closer to a two-week low, which might further contribute to capping the USD/JPY pair.

USD/JPY constructive technical setup backs the case for further near-term appreciating move

The 100-hour Simple Moving Average (SMA) edges higher at 158.16, and the USD/JPY pair holds above it, keeping the near-term tone bullish. The Moving Average Convergence Divergence (MACD) line sits marginally below the Signal line around the zero mark, with a small negative histogram that reinforces a cautious momentum backdrop. The Relative Strength Index (RSI) prints 56, slightly above the midline, suggesting steady buying interest. The ascending channel from 157.35 supports the uptrend, with resistance near 158.91. A decisive break could extend gains.

Price action respects the ascending structure, while the 100-period SMA continues to rise at 158.16 and acts as nearby support. The MACD remains below the Signal line and just under the zero level, while the negative histogram contracts, suggesting fading bearish pressure that could give way to renewed upside if momentum improves. RSI improves toward 56 from the mid-40s, aligning with stabilizing buying interest. Initial support stands near the lower channel boundary at 157.96. A failure to hold the channel floor would shift attention to downside risks.

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