Japanese Yen Forecast: Will USD/JPY Break 155 as BoJ, Fed Paths Diverge

A Bank of Japan rate hike and surging Japanese Government Bond yields led to the unthinkable this week. USD/JPY rallied to 157.765 on December 19, while 10-year JGB yields soared to 2.1% on December 22, before dropping to 2.026% on December 23.

Monetary policy uncertainty, concerns about the coming year’s fiscal budget and likely bond issuances, and intervention warnings clashed. Japan’s Finance Minister Satsuki Katayama threatened yen interventions for two consecutive days as USD/JPY climbed toward 158. The two days of warnings briefly sent the pair below 156.

Fiscal concerns have festered since Prime Minister Sanae Takaichi became the frontrunner to be Japan’s first woman prime minister. USD/JPY has risen 8.46% in H2 2025, while 10-year JGB yields have soared 0.60 basis points to 2.1%, the highest since February 1999.

Crucially, intervention threats overshadowed fiscal concerns and strong US economic data, supporting a bearish USD/JPY outlook. Japanese economic indicators will likely add to the market volatility as the Japanese government and the BoJ grapple with yen stability.

Below, I’ll discuss the macro backdrop, the near-term price catalysts, and technical levels traders should closely watch.

Japan’s Leading Economic Index in Focus

Following the choppy start to the week, the market focus will briefly shift to the Japanese economic calendar on Wednesday, December 24. The Conference Board Leading Economic Index (LEI) will give insights into the domestic demand outlook.

The LEI rose from 108.2 in September to 110.0 in October, indicating a pickup in business and consumer sentiment. Typically, a higher LEI reading indicates rising business investment, increasing employment, and stronger wage growth.

Higher wages would boost households’ purchasing power, fueling consumer spending and demand-driven inflation. This chain of events would support a more hawkish BoJ policy stance, strengthening the yen.

However, the weaker yen has pushed import prices higher, dampening households’ purchasing power and curbing private consumption. The effects of higher import prices on private consumption have been a key concern for the BoJ and the Japanese government, leading to yen intervention warnings.

An upward revision to the October LEI would align with improving sentiment toward the Japanese economy and strengthen the yen.  However, USD/JPY losses will likely be limited, considering the ongoing fiscal concerns and the BoJ’s cautious policy outlook and fading bets on a March Fed rate cut.

US Jobless Claims and Fed Rate Expectations

An unexpected surge in US GDP growth and a hotter-than-expected US price deflator tempered expectations of a March rate cut on Tuesday. A sharp increase in PCE prices signaled a sticky inflation outlook, while concerns mount about a decoupling of the labor market from GDP growth.

Later on Wednesday, initial jobless claims will come under scrutiny after last week’s weak US jobs report. Economists forecast initial jobless claims to slip from 224k (week ending December 13) to 223k (week ending December 20).

A lower claims reading would ease immediate concerns about the labor market, while supporting a more hawkish Fed policy stance. However, an unexpected spike in claims could revive Fed rate cut bets, supporting a bearish USD/JPY price outlook.

According to the CME FedWatch Tool, the chances of a March Fed rate cut dropped from 52.9% on December 22 to 45.1% on December 23. The sharp drop reflected the impact of the Q3 US GDP report on sentiment toward the Fed policy stance.

Yen Carry Trade Risks and Key Price Levels

While US data will influence US dollar demand and USD/JPY trends, risks of a yen carry trade unwind linger ahead of the holidays.

Elevated JGB and rising US Treasury yields will likely shift focus back to USD/JPY trends for early warning signs of an unwind. However, economists have mixed views on the USD/JPY’s breaking point. 10-year JGB yields could boost demand from domestic investors. The prospect of a stronger yen on repatriations and higher yields reinforces the constructive short- to medium-term bias.

A drop below 155 could be crucial for the negative short- to medium-term bias, given Tuesday’s low of 155.649.

Technical Outlook: USD/JPY on a Downward Trajectory

With markets monitoring technical indicators and fundamentals, they will offer crucial signals into potential USD/JPY price trends.

Looking at the daily chart, USD/JPY remained above the 50-day and 200-day Exponential Moving Averages (EMAs), indicating a bullish bias. While technicals remained bullish, fundamentals are increasingly outweighing the technical structure, indicating a bearish outlook.

A drop below the 155 support level would bring the 50-day EMA into play. If breached, 150 would be the next key support level. Importantly, a sustained break below the 50-day EMA would signal a bearish near-term trend reversal, paving the way to the 200-day EMA and 150. A break below the 200-day EMA would reinforce the bearish medium- to longer-term USD/JPY price outlook.

Position and Upside Risk

In my view, intervention threats will continue to cap USD/JPY gains, while elevated JGB yields could boost yen demand, signaling a negative price outlook. However, the BoJ’s messaging on the neutral interest rate will be crucial, given concerns about US inflation.

A higher neutral interest rate, neither accommodative nor restrictive, would signal multiple BoJ rate hikes. A more hawkish BoJ rate path would  sharply narrowing in US-Japan rate differentials. A less profitable yen carry trade into US assets and higher JGB yields would likely trigger a yen carry trade unwind, sending USD/JPY toward 130 in the longer term.

However, upside risks to the bearish outlook include:

• A dovish BoJ Governor Ueda and a 1% neutral rate.
• Strong US data.
• Hawkish Fed chatter.

This chain of events would fuel demand for the US dollar and send USD/JPY higher. However, yen intervention warnings are likely to cap the upside at around the 158 level, based on past communication.

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

Conclusion: Focus on the BoJ Neutral Rate

In summary, USD/JPY trends reflect shifting sentiment toward narrowing rate differentials. Market focus remains on BoJ Governor Ueda’s communications regarding the neutral rate.

A neutral rate at the higher end of the Bank’s current 1% to 2.5% range would signal more aggressive rate hikes. Multiple BoJ rate hikes would support the bearish short- to medium-term outlook for USD/JPY. A more dovish Fed policy stance colliding with a hawkish BoJ will likely push USD/JPY toward 130 in the 6-12 month time horizon.

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