The Japanese yen is struggling to stay afloat as Japan’s fiscal and monetary priorities pull in opposite directions. A vast ¥25 trillion stimulus package announced by Prime Minister Sanae Takaichi has reignited concerns about inflation and weighed heavily on the currency, while the Bank of Japan’s (BoJ) cautious stance on rate rises offers little support.

As a result, the yen remains pinned near a nine-month low, with the USD/JPY pair hovering around ¥155. Unless the government and central bank move towards a unified strategy, traders anticipate further weakness - particularly if the US dollar continues to draw strength from a patient yet resolute Federal Reserve.

What’s driving USD/JPY

The yen’s decline is rooted in a widening policy divide at the heart of Japan’s leadership. Takaichi’s administration has revived an Abenomics-style growth plan, prioritising fiscal spending to drive wage growth and consumer demand. Lawmakers have proposed a supplementary budget exceeding ¥25 trillion, fuelling fears of larger debt issuance and sending 40-year Japanese government bond yields to record highs.

The BoJ, meanwhile, faces conflicting pressures. Headline inflation, sitting around 2.9 per cent, remains above its target, yet the prime minister continues to argue that rates should stay low until wage-led inflation replaces cost-push price rises.

Governor Kazuo Ueda has signalled that policy tightening is possible if inflation persists, but uneven growth complicates matters. GDP rose 1.1 per cent year-on-year but shrank 0.4 per cent quarter-on-quarter. The uncertainty has left investors questioning whether Japan’s approach is boosting recovery - or undermining its currency.

Why it matters

This tug-of-war is reshaping the yen’s global reputation. Once viewed as a safe-haven anchor, the yen is behaving more like a risk-sensitive currency, moving in line with broader market sentiment. “Japan has added a tumultuous element - they’re a little more wild, a little more volatile,” said Juan Perez of Monex USA.

That volatility signals a fundamental shift: fiscal expansion now dominates the narrative, while monetary restraint fades into the background. For traders, the concern is that talk may replace action. Finance Minister Satsuki Katayama has expressed unease over the yen’s sharp depreciation, but Tokyo has so far held back from direct intervention. Analysts believe action is unlikely unless USD/JPY breaks decisively above ¥156 - a level considered politically sensitive rather than economically urgent.

Impact across markets

The impact of Japan’s policy divide is evident across bond and currency markets. The yield curve has steepened sharply as investors anticipate increased debt issuance, while short-term rates remain anchored near zero. This imbalance encourages capital outflows, with investors seeking higher yields abroad - further undermining the yen.

Across the Pacific, the Federal Reserve’s steady tone continues to lend support to the dollar. Policymakers, including Philip Jefferson and Christopher Waller have urged patience on rate cuts, reducing the likelihood of a December reduction to about 48 per cent, down from 60 per cent a week earlier (CME FedWatch).

As long as this interest-rate gap persists, analysts expect the dollar to remain structurally favoured over the yen - meaning any short-term yen recovery is likely to be temporary.

Expert outlook

Few analysts expect near-term relief for the yen. Barclays advises maintaining long dollar positions against the yen, arguing that Takaichi’s expansive policies will keep domestic yields low and sustain downward pressure on the currency. Yet a continued rise beyond ¥156 could test Japan’s tolerance and prompt a coordinated policy response.

Attention now turns to the delayed U.S. Non-Farm Payrolls (NFP) report, which is expected to offer fresh insight into America’s labour market. A weaker-than-expected reading could spark a short-term pullback in the dollar, giving the yen some breathing space. But unless Tokyo resolves its policy disconnect, any rebound is likely to be short-lived. For now, the yen’s direction is driven less by data and more by the imbalance between fiscal ambition and monetary caution.

USD/JPY technical analysis

At the time of writing, USD/JPY is trading around 155.45, extending gains within a price discovery zone as bullish momentum persists. The pair is hugging the upper Bollinger Band, signalling strong buying pressure but also hinting at a possible overextension.

The RSI is climbing toward the overbought region, reinforcing the risk of a short-term pullback or profit-taking. Immediate support lies at 152.96, followed by 146.45, where a breakdown could trigger sell liquidations and accelerate downside movement.

However, as long as prices hold above the middle Bollinger Band and 153.00, the broader uptrend could remain intact, supported by policy divergence between the Federal Reserve and the Bank of Japan

Key takeaway

Japan’s yen challenge is as much about communication as it is about economics. Expansionary fiscal policy is colliding with a cautious central bank, leaving markets uncertain which signal to trust. The outcome is a currency under consistent strain, with official warnings having little effect on steadying sentiment. Unless Tokyo aligns its fiscal drive with monetary stability, the yen’s fight to hold its ground may remain symbolic rather than successful.