USD/JPY: Yen strength elements emerged ahead of BoJ meeting next week

  • Hawkish speeches from BoJ officials coupled with a softer US core CPI print for December put an interim ceiling on US dollar strength against the yen.
  • The leading 10-year yield spread of the US Treasury note against the JGB has staged a bearish breakdown condition.
  • Medium-term uptrend of USD/JPY from 16 September 2024 low is at risk of shaping a potential multi-week corrective decline sequence.
  • Watch the key medium-term resistance of 158.35/80 on the USD/JPY.

Since the start of the new year, the persistent US dollar strength against the Japanese yen seen in the last quarter (Q4) of 2024 has started to ease.

Fig 1: Year-to-date performance of the US dollar against major currencies as of 16 Jan 2025 (Source: TradingView, click to enlarge chart)

Based on the year-to-date rolling performance as of Thursday, 16 January, the performance of the US dollar is the weakest against the yen versus other major developed nations’ currencies as the USD/JPY shed -0.77% (see Fig 1).

This week, speeches from the Bank of Japan (BoJ) Governor Ueda and his deputy Himino have mentioned encouraging remarks on a stronger positive outlook towards Japanese corporations raising employees’ salaries compared to December.

These positive remarks on wage growth in Japan have signalled a rate hike chance at the BoJ’s next policy meeting to be concluded on Friday, 24 January which in turn softened the USD/JPY’s prior bullish momentum coupled with a softer core US CPI print for December that eased to 3.2% y/y from November print of 3.3% and came in slightly below expectations of 3.3%.

Longer-term US Treasury yield premium shrinkage over JGB

Fig 2: 10-year yield spread of US Treasury/JGB with USD/JPY as of 16 Jan 2025 (Source: TradingView, click to enlarge chart)

The yield spread between the 10-year US Treasury note and the 10-year Japanese Government Bond (JGB) has a direct correlation movement with the USD/JPY (see Fig 2).

Based on past observations, the movement of the 10-year yield spread of the US Treasury against JGB has a lead time over the USD/JPY where the yield spread inched downwards on 5 November 2024 and broke below its 20-day moving average thereafter on 20 November 2024.

This prior bearish movement of the yield spread between the 10-year US Treasury note over the JGB took precedence ahead of the USD/JPY medium-term decline of 7% from 14 November 2024 to 2 December 2024.

Right now, a similar bearish movement of the 10-year yield spread of the US Treasury against JGB has been detected from 13 January 2025 to 14 January 2025 where the US Treasury yield premium declined from 3.6% to 3.7% and broke below the 20-day moving average at this time of the writing.

Hence, if the yield spread between the 10-year US Treasury note over the JGB continues to inch lower, the USD/JPY may see further downside pressure.

Bearish momentum detected

Fig 3: USD/JPY medium-term & major trend phases as of 16 Jan 2025 (Source: TradingView, click to enlarge chart)

The daily RSI momentum indicator of the USD/JPY has flashed on a recent bearish divergence condition at its overbought region since 8 January 2025 and just broke below the 50 level at this time of writing.

These observations suggest that the medium-term uptrend from the 16 September 2024 low of 139.58 is in jeopardy of shaping a potential multi-week corrective decline sequence.

Watch 158.35/80 key medium-term pivotal resistance and a break below 152.90 (also the 200-day moving average) may trigger the corrective decline to expose the next medium-term supports at 149.30 and 144.80 (see Fig 3).

On the other hand, a clearance above 158.80 invalidates the bearish scenario for a squeeze up to retest the 160.30/161.70 major resistance.

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Kelvin Wong

Kelvin Wong

Senior Market Analyst, OANDA at OANDA
Based in Singapore, Kelvin Wong is a well-established senior global macro strategist with over 15 years of experience trading and providing market research on foreign exchange, stock markets, and commodities.

Passionate about connecting the dots in the financial markets and sharing perspectives around trading and investment, Kelvin Wong is an expert in using a unique combination of fundamental and technical analyses, specializing in Elliott Wave and fund flow positioning, to pinpoint key reversal levels in the financial markets.

In addition, over the last ten years, Kelvin has conducted numerous market outlook and trading-related seminars, as well as technical analysis training courses, for thousands of retail traders.