USD/JPY Price Forecast: Extends the uptrend as fiscal and political concerns undermine JPY

The USD/JPY pair prolongs its uptrend for the fourth straight day – also marking the fifth day of a positive move in the previous six – and climbs to a nearly two-week high, closer to mid-146.00s during the first half of the European session on Wednesday. The Japanese Yen (JPY) continues with its relative underperformance amid nervousness over Japan’s fiscal outlook and domestic political uncertainty ahead of the snap lower house election on February 8. This has been a key factor behind the currency pair's uptrend witnessed over the past week.

Japan's already strained public finances have come under increased scrutiny after Takaichi, as part of her election campaign, pledged to suspend the 8% consumption tax on food for two years. Given that Japan's gross government debt has exceeded 200% of GDP for the past 15 years, Takaichi's spending and tax cut plans add to worries about Japan’s deteriorating public finances. Adding to this, data released last Friday showed that the headline Consumer Price Index (CPI) in Tokyo – Japan's capital city – fell to its weakest level since February 2022, pointing to softer demand-driven price pressure. This, in turn, reduces the urgency for the Bank of Japan (BoJ) to tighten further, following December’s decision to raise the benchmark rate to 0.75%, or a 30-year high, and continues to undermine the JPY.

Meanwhile, data released earlier today showed that Japan’s services sector growth accelerated at the start of 2026, with business activity expanding for the tenth straight month. In fact, the Jibun Bank Services PMI rose from 51.6 in December to 53.7, marking its fastest pace in almost a year and beating estimates for a reading of 53.4. This pointed to a durable recovery in the services sector, which accounts for roughly 70% of Japan’s GDP, though it fails to impress the JPY bulls. Traders, however, remain on high alert amid the possibility of a coordinated Japan-US intervention to stem the JPY's decline, bolstered by the unusual rate check by the New York Federal Reserve recently. Apart from this, subdued US Dollar (USD) price action might further contribute to capping the upside for the USD/JPY pair.

US President Donald Trump’s nomination of Kevin Warsh as the next Federal Reserve chair fueled speculations that the central bank will be less dovish than expected. Traders, however, are still pricing in the possibility of two more interest rate cuts by the Fed this year, which keeps a lid on the recent USD recovery from a four-year trough. Adding to this, the risk of a further escalation of tensions between the US and Iran could benefit the JPY's safe-haven status, warranting some caution for the USD/JPY bulls. A US Central Command spokesman said that a US Navy fighter jet shot down an Iranian drone in self-defence after it moved toward the aircraft carrier USS Abraham Lincoln in the Arabian Sea. This undermines the resumption of US-Iran nuclear talks this week and weighs on investors' sentiment.

USD/JPY 4-hour chart

Technical Analysis:

The USD/JPY pair flirts with the 156.50 confluence – comprising the 100-period Simple Moving Average (SMA) on the 4-hour chart and the 61.8% Fibonacci retracement level of the 159.13-152.06 downfall. A decisive close above would ease overhead pressure and expose the 78.6% retracement at 157.62, while rejection here could send the pair back toward the 50% retracement at 155.60.

The Moving Average Convergence Divergence (MACD) line holds above the Signal line and above zero, but the positive histogram has narrowed, hinting at fading bullish momentum. The Relative Strength Index (RSI) stands at 69.93, near overbought and at risk of curbing follow-through. With momentum stretched but easing, the USD/JPY pair  could consolidate below 157.62 unless buyers reclaim higher ground with conviction.

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