13.01.202611:52 Forex Analysis & Reviews: The Decline of the Japanese Yen Is Gaining Momentum

The decline of the Japanese yen is gaining momentum amid growing expectations of a further divergence in monetary policy between Japan and the United States. While the US Federal Reserve continues to face difficult policy choices and remains inclined toward a restrictive stance, the Bank of Japan is struggling with the timing and feasibility of future interest rate hikes. This imbalance is putting sustained pressure on the yen.

Speculation about snap elections that could be called by Prime Minister Sanae Takaichi is also weighing on the Japanese currency. Many traders are concerned that a change in government could lead to a shift in economic policy and undermine the yen's attractiveness. It is worth recalling that after Takaichi assumed office last year, the yen reacted with a sharp decline, as the new prime minister immediately announced a course of economic stimulus and support. This approach runs counter to the central bank's plans to raise interest rates.

Following yesterday's aggressive sell-off in the yen, Japanese officials stepped up verbal interventions, warning against excessive currency speculation. However, it remains unclear whether concrete measures will be taken to support the yen. Direct intervention in the foreign exchange market is a costly and often ineffective tool, and the government is likely to refrain from using it unless the situation becomes critical.

It is forecast that the yen could continue to weaken, potentially reaching the 160 level against the US dollar, unless there are significant changes in monetary policy or decisive government action to support the currency. Further depreciation of the yen could lead to higher import costs and increased inflationary pressure in Japan, creating additional challenges for the economy.

In the near term, traders will be closely monitoring yen dynamics, watching for signals of policy shifts from the Bank of Japan, government decisions regarding potential elections, and any signs of official intervention in the foreign exchange market. All of these factors will play a key role in determining the future direction of the Japanese currency.

As for the current technical outlook for USD/JPY, buyers need to break through the nearest resistance at 159.10. This would open the way toward 159.45, a level that is expected to be difficult to overcome. The most distant upward target stands at 159.75. In the event of a decline, bears will attempt to regain control at 158.75. A successful break below this level would deal a serious blow to bullish positions and could push USD/JPY down toward the 158.46 low, with the potential for a further move to 158.22.