Written by Linh Tran, Market Analyst at XS.com
USD/JPY is trading within a narrow range but remains at elevated levels, with recent sessions hovering around 156 – 157. This price behavior reflects a tug-of-war between two opposing forces: on one hand, Japan has officially entered a rate-hiking phase following a prolonged period of ultra-loose monetary policy, and on the other hand, the U.S. dollar continues to be supported by a relatively high interest-rate environment in the United States.
The fact that the pair has yet to establish a clear downward trend suggests that policy shifts from Japan, while structurally significant, have not yet been strong enough to reverse the short-term macroeconomic balance.
In recent months, the Bank of Japan (BoJ) has implemented historically significant adjustments. The BoJ has raised its policy rate to 0.75%, the highest level in nearly three decades, and has continued to signal that further rate hikes remain possible should inflation and wage growth stay on track.
Notably, according to Reuters, Japan’s money supply has declined for the first time in approximately 18 years, with the monetary base falling by around 4.9% year-on-year, marking a clear departure from decades of ultra-accommodative monetary policy. This represents a structural shift with important long-term implications for the Japanese yen.
However, despite this clear policy pivot, the yen has yet to recover in a sustainable manner, particularly against the U.S. dollar. In practice, USD/JPY has not declined, but instead continues to trade cautiously near its 52-week highs.
The core reason lies in the still-wide interest-rate differential between the United States and Japan. At present, the U.S. federal funds rate is maintained within the 3.50 – 3.75% range, with the effective federal funds rate (EFFR) around 3.64%, significantly higher than Japan’s 0.75% policy rate. This differential continues to sustain the attractiveness of carry-trade strategies, leaving structural selling pressure on the JPY largely intact, despite BoJ action.
Conversely, the U.S. dollar continues to benefit from relatively solid underlying support. Recent U.S. economic data suggest that growth is slowing in a controlled manner rather than deteriorating sharply. The ISM Manufacturing PMI stands at 47.9, indicating continued contraction in the manufacturing sector, while ISM Prices Paid remains elevated at 58.5, signaling that inflationary pressures have not fully dissipated. In this context, the Federal Reserve has sufficient justification to maintain a cautious policy stance, avoiding an overly rapid easing cycle. As a result, U.S. Treasury yields, although off their peaks, remain high enough to support the dollar and keep USD/JPY anchored at elevated levels.
It is precisely this combination of a USD that has not weakened decisively and a JPY that has only improved gradually that defines the current state of USD/JPY: low volatility, range-bound trading, and persistence at high levels rather than a meaningful decline. The market remains in a wait-and-see mode, requiring clearer signals from both the Fed and the BoJ before committing to a new trend.
From a personal perspective, in the short term, I expect USD/JPY to continue fluctuating within the 155 – 158 range, with any pullbacks remaining largely technical and lacking sufficient momentum to develop into a sustained downtrend. Only a clearer signal of policy easing from the Fed, or a much more aggressive tightening stance from the BoJ, would materially alter this balance.
In the medium term, the outlook for USD/JPY becomes less favorable for bullish positioning. With the BoJ having officially initiated a policy normalization cycle, alongside domestic pressures related to a weak yen and elevated import costs, the U.S. – Japan interest-rate differential is likely to narrow gradually over time. Once this process gains traction, USD/JPY may begin to form a medium-term peak, with scope for deeper corrective moves should macroeconomic conditions allow.
Nevertheless, risks must be closely monitored. Potential currency intervention by Japanese authorities, sharp swings in U.S. Treasury yields, unexpected economic data, or geopolitical shocks could all trigger outsized moves in USD/JPY. Consequently, the outlook for the pair in the period ahead will continue to depend primarily on monetary-policy expectations and global capital flows, rather than on technical factors alone.