Japanese Yen Forecast: Sticky Tokyo Inflation Clash with Fed Cut Bets

USD/JPY took the spotlight in early trading on Friday, November 28. Japanese inflation figures fueled speculation about a Bank of Japan rate hike. The sticky inflation figures coincided with reports of another solid wage rise in 2026, two key considerations for policymakers.

A weaker Japanese yen may also pressure the BoJ to raise interest rates, given the upward pressure on import prices. Higher import prices erode household purchasing power, weighing on private consumption.

Crucially, rising expectations of a BoJ rate hike clash with bets on a December Fed rate cut, signaling a reversal of USD/JPY’s November gains.

Tokyo Inflation and Retail Sales Spotlight the BoJ

Headline inflation for Tokyo increased 2.7% year-on-year in November, easing from 2.8% in October. However, the so-called core-core inflation rate held steady at 2.8%, well above the BoJ’s 2% target.

November’s data supported economists’ predictions for a December rate hike. In the November Reuters poll, conducted between November 11 and 18, 43 of 81 economists expected the BoJ to raise interest rates by 25 basis points to 0.75% on December 19.

Meanwhile, consumers opened their purse strings in October, indicating an economic recovery in the fourth quarter. Retail sales rose by 1.7% year-on-year, up sharply from a 0.2% increase in September. Rising consumer spending may fuel demand-driven inflation, bolstering the case for tighter monetary policy, given that inflation remains well above the BoJ’s target.

Wage Growth Trends Strengthen the Policy Narrative

Friday’s data followed updates from wage negotiations, with Japanese labor unions calling for another hefty wage hike in the spring of 2026. Notably, early signs of strong wage growth would ease the BoJ’s concerns over US tariffs having a longer-term impact on the Japanese economy. Higher wages could boost private consumption, which accounts for around 55% of GDP.

For context, the Japanese economy contracted by 0.4% quarter-on-quarter in the third quarter after expanding by 0.6% the previous quarter. Private consumption increased just 0.1% in the quarter, down from 0.4% in the second quarter.

Policy Risks: The Carry Trade Curveball

One potential curveball for USD/JPY could be the BoJ’s concerns about market disruption. In July 2024, the BoJ cut the purchases of Japanese Government Bonds (JGBs) and raised interest rates, sending USD/JPY below 140. The stronger yen triggered a carry trade unwind, leading to heavy losses across global equity and crypto markets. A BoJ rate hike, coupled with a Fed rate cut, may lead to another yen carry trade unwind, something policymakers may wish to avoid.

USD/JPY edged higher after the inflation and retail sales figures, despite a potential narrowing of US-Japan interest rate differentials in favor of the yen.

Fed Speakers in the Spotlight

While speculation about a BoJ rate hike intensifies, traders should closely monitor FOMC member speeches. Ahead of the Thanksgiving holiday, policymakers raised expectations of a December Fed rate cut.

Growing calls for further monetary policy easing next month could lead markets to fully price in a policy adjustment. A more hawkish BoJ and more dovish Fed may send USD/JPY toward 150.

According to the CME FedWatch Tool, the probability of a December cut has soared from 39.1% on November 20 to 86.9% on November 28.

USD/JPY Scenarios: Diverging Monetary Policies

• Bearish USD/JPY Scenario: Hawkish BoJ rhetoric or dovish Fed rhetoric could push USD/JPY toward 150.
• Bullish USD/JPY Scenario: Dovish BoJ comments or hawkish Fed signals could send USD/JPY toward 160.

Read the full USD/JPY forecast, including chart setups and trade ideas.

Key Market Drivers to Watch Today:

• Bank of Japan commentary.
• Fed speakers.

For more in-depth analysis, review today’s USD/JPY trading setups in our latest reports and consult the economic calendar.