USD/JPY extends its drop amid lingering USD headwinds despite strong NFPs

USD/JPY Analysis

The United States added 130,000 jobs in January, the best performance in more than a year, while unemployment pulled back to 4.3%, the lowest since August. Labour market resilience, coupled with persistent price pressures and macroeconomic uncertainty, raises the bar for additional Fed easing. This can be supportive for the USDOLLAR, along with easing independence concerns after the nomination of a Fed insider to succeed Chair Powell.

Meanwhile, the landslide victory of PM Takaichi in Sunday's Japanese election ^[1] can embolden her to push forward with her stimulus agenda, which can create significant headwinds for the Yen. Such expansive policies raise concerns about their funding and the fiscal position of the most indebted nation in the world according to the International Monetary Fund (IMF), with a 226.8% debt-to-GDP ratio. ^[2]

The strong NFPs that make Fed cuts harder, along with yen challenges from Japan's stimulus dynamics, can help USD/JPY rebound towards the pivotal EMA200. A move above it would reinstate the bullish bias and put the greenback back on track for new multi-year highs. However, a sustained recovery looks tough, and the pair remains exposed to deeper declines on fundamental headwinds.

The monetary policy dynamics are unfavorable, as the Bank of Japan is committed to its tightening cycle, while markets continue to expect two rate cuts by the Fed, and the next Chair may be more attuned to President Trump's preference for lower borrowing costs. Furthermore, dollar weakness is likely to persist, as it is well founded on disruptive trade policies and debt worries.These were brought back into the spotlight this week, as the Congressional Budget Office (CBO) raised its outlook, now expecting deficits to increase by $4.7 trillion in 2026–2035 due to the One Big Beautiful Bill ^[3]. At the same time, Japanese authorities have repeatedly warned of FX intervention to support the Yen in case of further weakness and volatility.