The USD/JPY pair is losing ground after posting modest gains in the previous session, trading around 156.20 during Asian hours on Monday. The pair weakens after the Bank of Japan (BoJ) opinion summary from the December policy meeting strengthened expectations for continued tightening in 2026, supporting the stability of the Japanese yen (JPY), sustaining upward pressure on Japanese government bond yields, and reducing the risks of sudden policy shifts.
The Bank of Japan’s summary showed that one member is of the view that interest rates should rise steadily to avoid falling behind the curve. Another noted that Japan’s real interest rate is the lowest in the world, which supports higher interest rates given the inflation risks associated with foreign currencies. One member said government stimulus could support growth over the next year or two, while another expected real wages to turn positive in the first half of next year.
USD/JPY is also facing challenges as the US dollar faces challenges amid continued expectations of two additional interest rate cuts by the Fed in 2026. Traders will likely focus on the minutes of the December Federal Open Market Committee (FOMC) meeting scheduled for Tuesday, which may shed light on the domestic policy discussions shaping the Fed’s 2026 outlook.
The Fed cut interest rates by 25 basis points at its December meeting, bringing the target range to 3.50%-3.75%. The Fed cut cumulative interest rates by 75 basis points in 2025 amid a cool labor market and still-high inflation.
The CME FedWatch tool shows an 81.7% probability of holding interest rates at the Fed’s January meeting, up from 77.9% the week before. Meanwhile, the probability of a 25 basis point rate cut fell to 18.3% from 22.1% a week ago.
Frequently asked questions about the Japanese Yen
The Japanese Yen (JPY) is one of the most widely traded currencies in the world. Their value is determined broadly by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the spread between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the powers of the Bank of Japan is to control the currency, so its movements are key to the yen. The Bank of Japan has intervened directly in currency markets on occasion, generally to devalue the yen, although it often refrains from doing so due to the political concerns of its major trading partners. The Bank of Japan’s ultra-loose monetary policy between 2013 and 2024 caused the yen to depreciate against its major counterparts due to the growing policy divergence between the Bank of Japan and other major central banks. More recently, the gradual dismantling of this ultra-lenient policy has given the yen some support.
Over the past decade, the Bank of Japan’s ultra-loose monetary policy stance has led to widening policy divergence with other central banks, especially the US Federal Reserve. This supported the widening of the spread between the US and Japanese 10-year bonds, which favored the US dollar against the Japanese yen. The Bank of Japan’s decision in 2024 to gradually abandon ultra-loose policy, along with interest rate cuts at other major central banks, are narrowing this spread.
The Japanese yen is often viewed as a safe investment. This means that in times of market stress, investors are more likely to put their money into the Japanese currency because of its supposed reliability and stability. Turbulent times are likely to strengthen the value of the yen against other currencies that are considered riskier to invest in.
