After retreating from the peak around 157.9, USD/JPY is currently moving sideways within a narrow range, reflecting market caution as both major central banks, the Fed and the BoJ, have yet to provide sufficiently clear policy signals to guide the next trend.
From the U.S. side, recent economic data indicate that the economy is gradually cooling: inflation continues to ease (2.7%), wage growth is slowing, and the unemployment rate has risen to its highest level in several years (4.6%).
These signals reinforce expectations that the Fed is moving closer to a monetary easing cycle in 2026.
However, in the near term, the Fed continues to maintain a cautious stance, emphasizing that policy decisions will remain highly data-dependent. This leaves the USD without strong downside pressure, but also lacking the momentum needed for a renewed breakout higher.
In contrast, the Japanese yen remains under significant pressure due to the BoJ’s monetary policy stance. Although the BoJ has gradually moved away from its ultra-loose policy framework, its current approach remains cautious and insufficient to materially narrow the interest rate differential with the U.S. As a result, the JPY struggles to stage a sustainable recovery in the short term, particularly as carry trade flows remain in place.
Looking ahead to 2026, the outlook for USD/JPY largely depends on two opposing policy scenarios. In the first scenario, if the Fed begins to ease policy more clearly while the BoJ remains cautious, the interest rate differential would narrow only slowly, placing downward pressure on USD/JPY – though this would likely manifest as a technical correction rather than a sharp trend reversal. Conversely, if the Fed maintains a cautious stance for longer than expected while the BoJ is not ready to tighten further, USD/JPY could soon resume its upward trend and re-test previous highs.
The most notable short-term risk comes from Japan. As the exchange rate remains elevated, the risk of hawkish rhetoric or direct intervention by Japan’s Ministry of Finance remains present. Any signal of intervention could trigger sharp short-term volatility, even if the longer-term monetary policy outlook remains unchanged.
In my view, USD/JPY is likely to continue trading sideways with a slight downward bias following its pullback from the peak, as markets await clearer signals from both the Fed and the BoJ. The next directional move of the pair will depend on whether the Fed decisively shifts toward easing in 2026 or maintains its cautious stance, while the BoJ remains a key variable in determining the extent of any recovery in the Japanese yen
