By Rania Gule, Senior Market Analyst at XS.com – MENA
The USD/JPY pair is moving within a pivotal zone where growth, inflation, fiscal, and monetary policy considerations intersect on both sides of the Pacific, making the outlook more complex than simply tracking headline data. In my view, the current fluctuation around the 152–154 range is not random; rather, it reflects a deep repricing of monetary policy expectations in both Japan and the United States. This comes amid clear economic slowing in Japan, contrasted with a cautious but persistent monetary tightening stance in the U.S., as the Federal Reserve continues to defend its anti-inflation credibility.
Recent Japanese GDP data, showing quarterly growth of just 0.1% versus expectations of 0.4%, confirm that the economy remains fragile, even though it narrowly avoided a technical recession after a previous contraction. Such weak performance places policymakers in a highly sensitive position: on one hand, there is a desire to normalize monetary policy after years of excessive easing; on the other, the economy may not withstand a sharp tightening shock. In my assessment, this contradiction explains the yen’s pullback from earlier gains, as markets have begun to question the Bank of Japan’s ability to move quickly on rate hikes without jeopardizing growth.
That said, expectations for a rate hike in April remain on the table, supported by comments from former officials and calls from international institutions such as the IMF to continue policy normalization. I believe the market is currently pricing in a dual scenario: if core inflation data come in near or above 2%, the Bank of Japan would have firmer ground to act, potentially giving the yen a temporary boost. However, if inflation disappoints and retreats from December’s 2.4% reading, tightening bets would likely unwind, renewing selling pressure on the Japanese currency. Personally, I lean toward inflation stabilizing near target without a major upside surprise, implying that any support for the yen would likely be limited in duration.
The fiscal dimension adds another layer of complexity. Expectations of large-scale spending plans to stimulate growth amid slowing momentum raise the prospect of a widening fiscal deficit. In theory and practice, a rising deficit tends to erode a currency’s appeal unless it is accompanied by strong growth or supportive capital inflows. From my perspective, any unrestrained fiscal expansion would be interpreted by investors as a signal of continued reliance on accommodative policies, thereby weighing on the yen through debt expectations and real yield dynamics. Consequently, I see fiscal risks tilting the balance in favor of continued dollar strength against the yen in the near term.
On the U.S. side, developments cannot be overlooked. Uncertainty surrounding the latest FOMC minutes, along with anticipation of data such as jobless claims and the Philadelphia Fed survey, keeps the dollar in a sensitive position. The Federal Reserve appears determined to maintain restrictive policy for longer if inflation remains above target. In my analysis, the Fed is unlikely to rush into rate cuts unless there are clear signs of sharp labor market deterioration or a sustained break in price pressures. This suggests that the yield differential between the U.S. and Japan will remain relatively wide, a fundamental factor underpinning elevated USD/JPY levels.
More importantly, the market no longer reacts to Japanese data in isolation from the global context. Even if the Bank of Japan delivers a symbolic rate hike, the absolute level of Japanese yields would remain low compared to U.S. yields. Therefore, I believe any strength in the yen would resemble a technical correction rather than a structural trend reversal—unless we witness a fundamental shift in yield curve control policy or a significant acceleration in domestic inflation.
In conclusion, my baseline view is that USD/JPY will likely hold near the 152 level in the near term, with the potential to test the 154–155 zone if U.S. data reinforce the current trajectory. Downside risks exist but would require either a strong upside inflation surprise in Japan or an abrupt dovish pivot from the Federal Reserve. Until one of these conditions materializes, I believe the balance of power remains tilted in favor of the U.S. dollar in the short run.