USD/JPY soft on Fed–BoJ diverging monetary policy paths

USD/JPY Analysis

The Bank of Japan raised rates by 25 bps earlier this month to 0.75% and the highest level in three decades, with officials signalling additional moves if the economy evolves as expected ^[1]. The Summary of Opinions published today reaffirmed the tightening bias, with one member stating that further increases are needed to "avoid falling behind the curve" and another noting that there remains a "considerable distance to the neutral". ^[2]

The central bank retains scope for further tightening as core inflation remains well above the 2% target, while elevated wage growth is expected to persist into the next fiscal year. In addition, the US-Japan trade agreement to lower tariffs and the government's sizeable fiscal stimulus could support the economy.

This hawkish bias is supporting the yen, alongside recent currency intervention warnings from Japanese officials. These include comments from the Finance Minister, who stated that "we are always ready to act" in a Bloomberg interview last week ^[3]. Meanwhile, the USDOLLAR is weighed down by the Fed's December rate cut and its easing bias ^[4], as the US economy and labour market face tariff-related headwinds.

These monetary policy dynamics are pressuring USD/JPY, leaving the pair vulnerable to a break below the 200-day EMA, which would challenge the upside momentum. However, the downside appears technically well protected, with the 38.2% Fibonacci retracement and the ascending trendline from the September lows following. This creates scope for a recovery and keeps the 2025 peak in play.

The Bank of Japan may have raised rates but maintained its slow and gradual approach, while economic headwinds may limit the extent of further tightening. Moreover, the US central bank remains on a cautious easing path, with the latest Summary of Economic Projections pointing to just one rate cut in 2026.