USD/JPY technical outlook remains pressured; can the Yen's policy support hold?

Trading Opportunities Amid Exchange Rate Fluctuations

The USD/JPY currency pair saw a slight rebound during the Asian session on Tuesday, approaching the 157.00 level. This movement was mainly driven by market expectations of possible intervention by the Japanese government in the foreign exchange market. However, this upward momentum appears to be short-lived—rising expectations of Fed rate cuts are weighing on the dollar, while worsening economic fundamentals in Japan are limiting the yen’s upside potential.

Traders are watching two key moments: first, the release of US Producer Price Index (PPI) and retail sales data later today; second, the Federal Reserve’s policy meeting on December 10. Before these major data releases, the market is likely to remain cautious.

Frequent Policy Signals from Japan

Japan’s Finance Minister Satsuki Katayama recently issued the strongest stance, stating that on Friday, Japan will take “appropriate measures” as needed to address excessive volatility and disorderly market movements, widely interpreted as a warning of intervention. Key government officials, such as Takumi Aida, also explicitly stated that Japan has the capacity to intervene proactively in the foreign exchange market to mitigate the impact of yen depreciation on the economy.

These signals have indeed scared off some yen shorts, but the durability of policy deterrence remains questionable. The reason is Japan faces greater constraints—last week, the Cabinet approved an economic stimulus package worth up to 21.3 trillion yen, the largest since the pandemic. The plan was initially approved on November 28 through a supplementary budget to support this initiative, which heightened market concerns over sustained Japanese government debt accumulation, pushing long-term Japanese government bond yields to record highs.

Contradictions Between Economic Data and Central Bank Stance

Recent third-quarter economic data showed Japan’s GDP contracted for the first time in six quarters, which should have pressured the Bank of Japan to delay rate hikes. However, BOJ Governor Ueda Kazuo remains open to a December rate increase and told Parliament that yen depreciation could push up overall prices. This dilemma reflects the BOJ’s challenge in balancing growth stabilization and inflation control. Japan’s inflation has remained above the 2% target for over three years.

In contrast, the Federal Reserve’s stance is shifting toward easing. Fed Governor Christopher Waller stated on Monday that current data indicate the US labor market remains weak enough to support a 25 basis point rate cut in December. Previously, New York Fed President John Williams described the current policy environment as “moderately restrictive,” implying room for further rate cuts. This has increased market expectations of about an 80% chance of a Fed rate cut in December.

Technical Outlook: Bulls Test the 157 Level

From a technical perspective, USD/JPY is short-term trading around 157.00, a key level that bulls need to confirm. A successful break and stabilization above this level could target the intermediate resistance zone of 157.45-157.50, then challenge the 157.85-157.90 area, and even the ten-month high reached last week. Breaking through the 158.00 round figure would constitute a new technical breakout, opening the door for further appreciation.

On the downside, initial support is seen around 156.25-156.20. If the decline continues, the 156.00 round figure will serve as a second line of defense. A break below this point could shift focus to the intermediate support zone of 155.45-155.40, with the psychological level at 155.00 as the next target. Further pullbacks may find solid support around 154.50-154.45, which could become a key turning point and a strong short-term bottom.

Market Focus Moving Forward

The fundamental backdrop appears more favorable for USD/JPY to move higher. Although Japan has signaled potential intervention, debt pressures, sluggish growth, and uncertainty over central bank policies are weakening the yen’s rebound momentum. Meanwhile, rising expectations of Fed rate cuts are exerting downward pressure on the dollar. Traders should monitor US economic data trends and policy signals ahead of the December Fed meeting, as these factors will directly influence the short-term direction of USD/JPY.