The Yen’s balancing act

Dollar-Yen has become the world’s macro fault line — the seam where two tectonic plates grind in opposite directions. On one side lies the gravitational pull of Fed easing; on the other, the political uplift of a revived Abenomics under Japan’s new leadership.

The Takaichi shockwave cracked that seam wide open — USD/JPY gapped to 153.27, the biggest opening surge in 35 years, before collapsing last week to 149.40 as U.S. credit tremors triggered a wave of risk aversion.

That level matters because the day’s low at 149.38 nearly tagged the 61.8% retracement of the post-election surge — right where the 21-day moving average stepped in to catch sellers mid-session, turning that level into the equivalent of a FX Maginot Line of sorts

Now, at 151.40, the pair hovers uneasily between gravity and lift — suspended in the no-man’s-land between macro conviction and political theatre.

The logic of this tug-of-war is brutally simple. If the Fed cuts aggressively, yield differentials narrow and the dollar should weaken. But if Takaichi revives the Abenomics formula — fiscal expansion, wage incentives, structural reform — it’s surmised the BoJ will once again become the liquidity engine of the world. Selling USD/JPY in that setup feels like stepping in front of a turbine; carry momentum does the rest.

Enter Satsuki Katayama, the likely new finance minister. Her arrival could attempt the impossible — giving Japan room to spend boldly and defend its currency. Katayama could blend fiscal audacity with a steady hand on the yen, but only if the BoJ cooperates. That’s the tension: the central bank’s new monetary impatience — its eagerness to normalize before the market is ready — risks unsettling that fragile balance. A Katayama–Takaichi tandem might still pull off a rare alignment: domestic expansion with external stability. In that world, fair value for USD/JPY doesn’t start with a 15; it likely lives somewhere around 140–130. Real-money desks are likely already quietly reviewing those models.

Meanwhile, the positioning wash tells its own story. Virtually everyone — and their pet cat — was short USD/JPY into the LDP vote. Hedge funds, CTAs, and macro tourists piled in, only to be flattened by the post-election gap, forced to cover, flip long, and then get rinsed again as credit stress hit. The yen no longer trades like a clean rates proxy; it’s become a mean-reversion grind wearing a carry costume — a pair that tempts with yield but punishes when vol sparks.

Adding to the confusion, FX and rates have decoupled. The 90-day correlation between USD/JPY and the U.S.–Japan two-year spread has flipped to –0.54, the most inverse since 2020. The old compass is broken, so traders are navigating with structure — options, calendars, knock-ins — instead of conviction.

So while a move back above 151 might look encouraging for dollar bulls, my Tokyo contacts are telling a very different story. Dealers there have been quietly running risk-reversal books in the yen’s favour, leaning into USDJPY downside protection rather than chasing carry. The word from the dealing rooms is that 155-plus — once treated as the intervention kill zone — is a fantasy trade.

So here we stand, 151.40 — the fault line of global policy. The Fed’s easing gravity tugs one way, Tokyo’s political ambition pushes the other, and beneath it all the BoJ hums restlessly as the world’s liquidity engine. Until one of those plates finally shifts, dollar-yen will keep trembling in this narrow corridor — every tick another small tremor in the market’s long wait for balance.

In other words, dollar-yen remains stuck in that uneasy no-clear-compass zone — a reflection of the broader FX mood in the second half of 2025, where direction is murky, conviction is thin, and every trade feels more like navigation than momentum.

Elsewhere, the market’s pulse has steadied. Credit jitters have faded, giving way to a modestly hawkish repricing across the Fed curve and lifting the dollar back onto a firmer footing. EUR/USD looks heavy and could slide below 1.1600 in the coming days, though a sustained move toward the mid-1.1550s probably needs a hotter-than-expected US CPI print to ignite it.

Outside of the whippy yen tape, FX volatility has cooled as US equities extend their rebound on eased credit concerns. Even Zions Bank’s results, while carrying some fraud-related blemishes, didn’t add fuel to the systemic worry narrative. For now, the market is back to doing what it does best — discounting yesterday’s panic.

The Dollar has shrugged off last week’s banking angst and now sits barely 0.7% below its October 10 high. With Fed expectations still glued to credit sentiment, the latest rebound owes much to a hawkish turn in the USD OIS curve — two-year yields climbed 7bps yesterday, underscoring the market’s instinct to re-price risk once fear fades.

Meanwhile, US-China trade noise remains stuck in neutral ahead of the late-month Trump-Xi meeting. Washington’s weekend deal with Australia to secure access to rare-earth reserves adds a faint strategic twist — a reminder that the US is quietly fortifying its supply chain — but it’s not yet moving FX. For now, traders are content to sit on their hands, balancing cautious optimism with a healthy respect for how quickly this calm can change.