Analyst: If CPI Data Boosts USD, Japan Authorities May Be Forced to Act to Support JPY

The USD/JPY pair revisited its one-year high of 159.00 during European trading on Tuesday, driven by continued underperformance of the Japanese Yen. The yen's weakness is attributed to political uncertainties in Japan, including the potential for a snap election and speculation around expansionary fiscal policies. Market participants are also focused on the release of the U.S. Consumer Price Index (CPI) data, which could influence the strength of the dollar.

Political developments in Japan have intensified concerns about the yen's depreciation. Prime Minister Sanae Takaichi is reportedly considering calling an early general election in February to strengthen her coalition government's parliamentary majority. This move has fueled the so-called 'Takaichi trade,' where investors are shifting capital into risk assets, further weakening the yen's safe-haven status.

Japan's Finance Minister Satsuki Katayama has expressed concerns about the yen's 'one-sided depreciation', noting that she shared these concerns with U.S. Treasury Secretary Scott Bessent. Katayama's comments indicate a possible U.S. acquiescence to potential Japanese intervention in currency markets. Deputy Chief Cabinet Secretary Masanao Ozaki warned that the government will take appropriate steps against excessive currency movements, including those driven by speculation.

Why Did This Happen?

The yen's depreciation is linked to a combination of factors. Japan's political uncertainty and the potential for expansionary fiscal policies have reduced the yen's appeal as a safe-haven currency. Additionally, the Bank of Japan's (BoJ) delayed policy normalization has contributed to the yen's weakness.

The U.S. dollar has also been supported by the Federal Reserve's (Fed) cautious approach to rate cuts. Traders are pricing in only one more 25-basis-point cut in 2026, with the terminal rate projected to rise to 3.25%. This outlook contrasts with the BoJ's more gradual tightening path, which has limited the yen's potential for recovery.

How Did Markets React?

The USD/JPY pair has been confined to a range between 154.40 and 157.90 for over a month, with price hovering around the rising 20-day EMA. The pair's movement above 157.00 could signal a resumption of the broader uptrend, with 157.70 and 158.88 as key resistance levels.

Market sentiment has been mixed, with the yen's weakness leading to increased speculation about Japanese government intervention. Analysts at ANZ and JPMorgan have suggested that the yen's fundamentals remain weak and unlikely to improve significantly in the near term. This sentiment is reflected in the USD/JPY pair's potential to rise to 164 by the end of 2026.

What Are Analysts Watching Next?

Analysts are closely monitoring the U.S. CPI data for December, which is expected to show a rise in core inflation to 2.7% year-on-year. A stronger-than-expected inflation reading could reinforce the Fed's cautious stance on rate cuts, further supporting the dollar and exerting additional downward pressure on the yen.

Japanese officials are also watching the political developments closely. The outcome of the snap election will be a key determinant of the yen's trajectory, as a victory for Takaichi's coalition could lead to more expansionary fiscal and monetary policies.

Investors are also keeping an eye on the U.S. labor market and the potential impact of new tariffs on global trade dynamics. The Nonfarm Payrolls (NFP) report and the Supreme Court's decision on Trump-era tariffs are seen as potential catalysts for market volatility.

The yen's weakness has also raised concerns about its impact on Japan's import-dependent economy. A continued depreciation could exacerbate imported inflation, affecting households and businesses. This has led to increased calls for policy interventions to stabilize the currency.