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Fundamental analysis

05.02.202617:59 Forex Analysis & Reviews: USD/JPY: Analysis and Forecast

The Japanese yen remains weak against a moderately firm U.S. dollar due to risks surrounding the country's fiscal condition amid expansionary fiscal initiatives proposed by Prime Minister Sanae Takaichi. Political instability ahead of the February 8 snap elections is acting as an additional source of pressure on the yen. Meanwhile, weak Tokyo consumer inflation data released last week reduced expectations of an imminent rate hike by the Bank of Japan, further pushing USD/JPY toward the psychological 157.00 level.

Sanae Takaichi's Liberal Democratic Party (LDP) is likely to secure a decisive victory in the lower house elections on February 8. Such an outcome would strengthen the prime minister's control over the legislative process and expand the scope for implementing economic stimulus measures.

During the election campaign, Takaichi proposed freezing the 8% consumption tax on food products for two years, which heightened concerns over Japan's fiscal burden amid increased reliance on borrowed funds. This factor became a key driver behind the recent decline in the yen's attractiveness since the start of the week.

Moreover, in her campaign speeches, Takaichi emphasized the benefits of a weak national currency, although she later adjusted her rhetoric. Her remarks cast doubt on the authorities' willingness to intervene to support the yen, adding further downward pressure on the currency.

Meanwhile, data released last Friday showed that Tokyo's core Consumer Price Index (CPI) fell to its lowest level since February 2022, signaling easing demand-driven price pressures and reducing the need for further monetary tightening by the Bank of Japan.

However, the minutes of the Bank of Japan's January meeting, published earlier this week, revealed a firm stance among board members in response to inflation risks stemming from yen weakness. In addition, a private survey reported that growth in the services sector accelerated in January at the fastest pace in nearly a year.

This keeps the possibility of a Bank of Japan rate hike in the first half of 2026 alive.

On the other side of the pair, the market is pricing in two additional rate cuts by the U.S. Federal Reserve this year, keeping USD/JPY near the psychological 157.00 level.

U.S. President Donald Trump stated that he would withdraw Kevin Warsh's nomination for Fed chair if Warsh supported rate hikes and expressed confidence that the central bank would cut rates soon.

However, the U.S. dollar reached its highest level since January 23 following hawkish remarks by Federal Reserve Governor Lisa Cook about prevailing risks of accelerating inflation. This could support USD/JPY, especially ahead of two key U.S. labor market reports.

From a technical perspective, yesterday's break above the 20-day SMA favored bulls, and today's move above the psychological 157.00 level also supported bullish sentiment, although prices later slipped back below that level. It is worth noting that the Relative Strength Index has moved into positive territory, while the MACD remains in negative territory, but its histogram is narrowing, indicating weakening bearish pressure.

If prices consolidate above the psychological 157.00 level and break through resistance at 157.40, they are likely to move toward the psychological 158.00 level, after which they could challenge the January high.

If the pair fails to hold above the 20-day SMA and the 50-day SMA, it may accelerate its decline toward the psychological 156.00 level and below.

Nevertheless, at the current moment, the constructive technical setup for USD/JPY confirms the potential for further strengthening of the pair.

*تعینات کیا مراد ہے مارکیٹ کے تجزیات یہاں ارسال کیے جاتے ہیں جس کا مقصد آپ کی بیداری بڑھانا ہے، لیکن تجارت کرنے کے لئے ہدایات دینا نہیں.

Irina Yanina,
Analytical expert of InstaSpot
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