Expectations of interest rate hikes in Japan drive the yen higher; political uncertainties limit the scope for further gains

The market has recently been paying close attention to the Bank of Japan’s hawkish stance and expectations of interest rate hikes, and their impact on the yen. As Japan’s political situation evolves, the yen shows clear potential for appreciation against the dollar, but multiple factors also limit further gains.

In recent Asian trading, the yen has continued to strengthen against the dollar, reversing two days of decline. This rally is mainly driven by rising market expectations of a joint intervention by Japan and the U.S. The Japanese Finance Minister, Shunichi Katayama, recently stated that he will maintain close coordination with U.S. authorities based on the U.S.-Japan joint statement signed last September, and respond to currency market movements in a timely manner. These comments have opened up policy support for yen appreciation.

The hawkish stance of the central bank and expectations of rate hikes are the main drivers of yen appreciation

The Bank of Japan has expressed clear concern over the inflationary pressures caused by a weaker yen. According to the minutes of the January meeting, policymakers discussed in depth the rising import costs due to a weak yen, reflecting an increasingly hawkish internal stance. This shift suggests the possibility of rate hikes is increasing.

Japan’s Prime Minister Sanae Sato’s fiscal policy inclinations also indirectly reinforce market expectations of rate hikes. The Prime Minister promised that if the Liberal Democratic Party wins the February elections, the consumption tax on food will be suspended for two years. Such expansionary fiscal measures typically raise inflation expectations, which can catalyze the central bank to raise interest rates. Katayama defended the Prime Minister’s comments on the yen’s weakness, saying that the Prime Minister was generally discussing the impact of yen depreciation on the economy, implying some official support for yen appreciation.

Political uncertainty and global risk environment are restraining the rally

Despite the favorable outlook for rate hikes supporting the yen, domestic political variables are restraining further gains. The early February election results and the ruling prospects of the LDP remain uncertain, causing investors to remain cautious before actively betting on yen appreciation. Unclear political developments could lead to policy swings, weakening the yen’s appeal as a safe-haven asset.

Improved global risk sentiment is also reducing demand for the yen. U.S. President Trump recently announced a trade agreement with India and immediately lowered tariffs, boosting expectations of economic recovery. Additionally, signs of easing tensions between the U.S. and Iran have lowered risk premiums, further supporting positive market sentiment. These factors exert pressure on the yen, a traditional safe-haven currency.

The strong rebound of the US dollar provides solid support

The recent recovery of the dollar has been a key factor limiting further declines in USD/JPY. The latest data from the Institute for Supply Management shows U.S. manufacturing activity expanded for the first time in a year in January, with the manufacturing PMI rising to 52.6 from 47.9 last month. This economic improvement helps the dollar regain strength.

The dollar has already rebounded significantly from its four-year lows touched last month and is now consolidating this upward move. President Trump’s nomination of hawkish official Kevin Waugh to succeed Jerome Powell as Federal Reserve Chair (pending Senate approval) also reinforces market expectations of a tightening bias in U.S. monetary policy. Waugh’s hawkish background suggests that if inflation expectations rise, the Fed will remain cautious, supporting the dollar.

Technical outlook: USD/JPY faces key resistance levels

From a technical perspective, USD/JPY is struggling near the 50% retracement of the recent decline from 159.23 to 152.10. This level is approximately at 155.65, representing a critical support zone. If USD/JPY can break above this retracement level convincingly, it could further rise toward 156.45—where the 61.8% Fibonacci retracement and the 200-week simple moving average on the 4-hour chart converge.

The current 200-week SMA is sloping downward around 156.50, maintaining a generally bearish technical tone. Trading below this long-term indicator, attempts to rebound when testing this line are likely to face strong selling pressure. Although the MACD remains positive and above its signal line, momentum has clearly weakened, with the histogram shrinking. The RSI is at 61, staying above the midline of 50, but not yet in overbought territory.

Market outlook: Policy versus technical tug-of-war

If USD/JPY can decisively break above the 156.45 resistance zone, further upside momentum could be unlocked. However, failure to sustain above this level may lead sellers to dominate, risking a further correction within the current bearish structure. Traders are currently awaiting upcoming U.S. JOLTS job openings data for fresh directional cues during the North American session.

Nevertheless, the mixed fundamental backdrop—supportive of a rate hike policy from Japan, but constrained by political uncertainty and global risk sentiment—suggests caution before establishing new USD/JPY positions. The actual implementation of BOJ rate hikes and domestic political developments will be key factors in determining the yen’s future trajectory.