Japanese Yen Forecast: USD/JPY Retreats as Policy Gap Narrows

USD/JPY traders brace for a crucial mid-week session on Wednesday, November 26, as markets adjust bets on BoJ and Fed monetary policy stances.

Early updates from Japan’s annual wage negotiations for 2026 suggest another substantial pay hike, supporting a December BoJ rate hike. BoJ Governor Kazuo Ueda recently underscored the importance of annual wage negotiations, commonly known as Shunto. He stated that more data would be needed from wage discussions to assess whether US tariffs would force firms to limit wage hikes.

Meanwhile, US economic data and FOMC members have fueled speculation of a December Fed rate cut, signaling a potential narrowing of US-Japan rate differentials, and favoring the yen. Monetary policy divergence could materially alter USD/JPY’s recently bullish trajectory, placing a greater emphasis on incoming data.

Japan Leading Economic Index in Focus

On Wednesday, November 26, Japan’s Leading Economic Index (LEI) will provide insights into business and consumer sentiment at the end of the third quarter. Economists expect the LEI to rise from 107.0 in August to 108.0 in September.

A higher LEI reading could point to increased business investment and higher wages, aligning with updates from wage negotiations. Crucially, higher wages could boost households’ purchasing power, leading to higher spending and rising demand-driven inflation. Furthermore, improving consumer sentiment may also translate into an upswing in private consumption.

For context, the LEI dropped to 104.2 in April, its lowest level in two years before edging higher. LEI trends reflected trade developments. These trends suggest a September pickup, given that the US lowered tariffs on Japanese goods to 15% in September. The softer yen could also lift sentiment, given that USD/JPY strength would offset the effect of tariffs on company profit margins.

With the BoJ’s focus on wages and inflation, improving sentiment would support a more hawkish BoJ rate path and a stronger yen. Notably, USD/JPY briefly dropped below 156 this week. Traders reacted to updates from Japan’s wage negotiations and softer US economic data.

Pre-US Holiday and Fed Speakers Expose US Dollar to Potential Reversal

Amid rising bets on a December BoJ rate hike, US jobs data could boost bets on a December Fed rate cut, potentially sending USD/JPY sharply lower.

Economists forecast initial jobless claims to rise from 220k (week ending November 15) to 227k (week ending November 22). A larger-than-expected increase could bolster bets on a December rate cut, weighing on demand for the US dollar. A potential narrowing in US-Japan interest rate differentials could push USD/JPY toward 155.

For context, the ADP reported a 13.5k 4-week average drop in employment, signaling a cooling labor market. A third consecutive decline in the 4-week average sent USD/JPY lower, highlighting the pair’s likely response to higher jobless claims.

Beyond the data, traders should monitor FOMC members’ speeches. Reaction to US economic data and views on the timeline for cutting rates will influence USD/JPY trends. Growing calls for a December cut could accelerate the pair’s fall toward 150.

USD/JPY Scenarios: Diverging Monetary Policies

• Bearish USD/JPY Scenario: Hawkish BoJ chatter, strong Japanese data, weaker US data, and dovish Fed rhetoric could drag USD/JPY toward 150.
• Bullish USD/JPY Scenario: Dovish BoJ comments, weaker Japanese data, stronger US data, and hawkish Fed chatter 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.
• Japanese data.
• US data.
• Fed speakers.

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