Japanese Yen sticks to negative bias, lacks follow-through amid hawkish BoJ outlook

Japanese Yen struggles to capitalize on its strong gains amid concerns about Japan’s fiscal health.
The BoJ’s hawkish outlook and intervention fears might continue to act as a tailwind for the JPY.
The USD hangs near a four-month low amid Fed rate cut bets and might keep a lid on USD/JPY.

Haresh Menghani FXStreet

The Japanese Yen (JPY) remains on the defensive through the early European session on Tuesday amid concerns about Japan's fiscal health on the back of Prime Minister Sanae Takaichi's aggressive spending and tax cut plans. Apart from this, a generally positive risk tone seems to undermine the safe-haven JPY amid domestic political uncertainty ahead of a snap election on February 8. This, along with a modest US Dollar (USD) uptick, assists the USD/JPY pair in moving away from its lowest level since November 2025, touched on Monday.

Any meaningful JPY depreciation, however, seems elusive amid speculations that Japanese authorities would step in to stem further weakness in the domestic currency and the Bank of Japan's (BoJ) hawkish stance. The USD, on the other hand, might struggle to lure buyers amid bets that the Federal Reserve (Fed) will lower borrowing costs two more times this year. This, in turn, warrants some caution before positioning for a further USD/JPY recovery in the near-term as the spotlight remains on the crucial two-day FOMC meeting, starting today.

Japanese Yen is undermined by domestic political uncertainty and fiscal woes

Japan's already strained public finances have come under increased scrutiny after Prime Minister Sanae Takaichi's pledge to suspend sales tax on food items as part of her campaign ahead of a snap lower house election on February 8.
Nervousness over Japan’s fiscal outlook had been a key factor behind the recent surge in long-dated Japanese government bond (JGBs) yields, which will push up debt servicing costs. This, in turn, caps the upside for the Japanese Yen.
Data released earlier this Tuesday showed that wholesale inflation in Japan slowed in the year to December. In fact, the Producer Price Index (PPI) climbed 2.4% YoY during the reported month, down from 2.7% rise recorded in November.
Additional details revealed that Japan's Corporate Service Price Index rose 2.6% YoY in December compared to 2.7% prior. There was nothing in the data to contradict the Bank of Japan's rate-hike path, and it does little to influence the JPY.
In fact, the BoJ raised its economic and inflation forecasts after leaving short-term interest rates unchanged at the end of a two-day meeting last Friday. The central bank also signaled readiness to continue hiking still-low borrowing costs.
This marks a significant divergence compared to dovish US Federal Reserve expectations, which keeps the US Dollar on the defensive near a four-month low and supports the JPY amid fears of a potential intervention by Japanese authorities.
Japan's PM Sanae Takaichi warned on Sunday that officials stand ready to take necessary steps against speculative and highly abnormal market moves following rate checks from Japan’s Ministry of Finance and the New York Fed on Friday.
Traders, however, seem reluctant to place aggressive directional bets and might opt to move to the sidelines ahead of a two-day FOMC meeting, starting today. The outcome will drive the USD and the USD/JPY pair in the near term.

USD/JPY bears have the upper hand; attempted recovery might get sold into

The USD/JPY pair showed some resilience below the 100-day Simple Moving Average (SMA) on Monday, though it remains below the 154.75-154.80 horizontal support breakpoint. The Moving Average Convergence Divergence (MACD) histogram extends deeper into negative territory, indicating the MACD line below the Signal line and momentum under pressure below zero. The Relative Strength Index (RSI) sits at 32 (near oversold), suggesting downside could be stretched.

A daily close below the 100-day SMA at 153.81, which supports the USD/JPY pair in the near term, would hand bears more control, while sustained trade above it would keep the bias anchored by the rising SMA. A flattening MACD histogram and a move back toward the zero line would hint at momentum stabilization, and an RSI recovery toward 50 would improve tone; conversely, a drop into sub-30 would risk further weakness.

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

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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