USD/JPY Fundamental Daily Forecast – Rangebound Despite Pressure on BOJ to Tighten Policy

The Dollar/Yen is slightly higher on Wednesday but still consolidating inside its nearly two week range. It’s been a choppy week for the Forex pair so far this week. After rising to a near 1-week high on Monday, sellers to take away some of those gains.

At 03:18 GMT, the USD/JPY is trading 130.351, up 0.172 or +0.13%. On Tuesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $71.68, up $0.31 or +0.43%.

Last week, the USD/JPY fell to as low at 127.227, its weakest since May 2022, ahead of a Bank of Japan (BOJ) Policy Review at which investors bet the central bank might signal the end of its stimulus program. The BOJ, however, left policy unchanged, giving the dollar some respite.

Japan Higher Rates Expand Debt Pile, Balanced Budget Seen Delayed Again

Japan raised its estimates for long-term interest rates over the coming new years in government’s twice-yearly fiscal projections issued on Tuesday, following the central bank’s decision last month to allow 10-year bond yields to move more widely.

Higher rates will test the government’s ability to service the industrial world’s heaviest debt burden at more than double the size of Japan’s annual economic output.

While a decade of aggressive monetary stimulus under Bank of Japan Governor Haruhiko Kuroda did little to economic growth, which averaged around 1% over that time, it has kept the government’s borrowing costs at rock-bottom.

Now the government sees Japan’s primary budget surplus in fiscal 2026, although that surplus would “come into sight” in the next fiscal year if it strives to streamline government budget spending.

Japan’s Factory Activity Extends Declines for Third Straight Month – PMI

Japan’s manufacturing activity contracted for a third straight month in January as export weakness persisted amid a worsening global outlook, a corporate survey showed on Tuesday.

The au Jibun Bank flash Japan manufacturing purchasing managers’ index (PMI) was at a seasonally adjusted 48.9 in January, unchanged from the final reading in the previous month.

BOJ Core CPI

Early Tuesday, the Bank of Japan’s Core Consumer Price Index (CPI) came in at 3.1%, higher than the 2.9% forecast and previous reading.

Short-Term Outlook

The price action remains subdued ahead of Wednesday’s trading session with no major reports due to be released in the United States. However, investors are likely bracing for the BOJ Summary of Opinions at 23:50 GMT.

Additionally, we don’t expect traders to make a major move in either direction ahead of Thursday’s U.S. GDP data and Friday’s US PCE Price Index.

For that matter, we could see a rangebound trade until the Federal Reserve’s interest rate decision on Feb. 1.

Ahead of the Fed’s decision, futures traders see only two more quarter-point rate hikes by the Fed to a peak of around 5% by June, before it starts cutting rates later in the year. The Federal Reserve itself has insisted it still has 75 bps of increases in the pipeline.