Outlook
The yen is likely to stay under mixed pressure in the near term. A shift toward monetary tightening by the Bank of Japan (BoJ) supports potential yen resilience on hawkish surprises, but a record fiscal 2026 budget and easing inflation put downward pressure on the currency. FX intervention readiness caps some losses but is unlikely to completely reverse the trend. Overall, expect a cautious, range-bound path with occasional strength on policy surprises but a bias toward softer levels versus the USD and EUR.
Key drivers
- BoJ policy adjustments (Bank of Japan): December 2025 rate hike to 0.75% with potential for further hikes if inflation persists. Markets price in possible additional tightening if inflation remains firm.
- Fiscal stimulus measures: Record general-account budget of about JPY 122 trillion for 2026; growth support but potential for yen depreciation as fiscal expansion weighs on balance of payments.
- Inflation trends: Tokyo inflation eased to 2% in December 2025, the lowest in over a year; influences expectations for BoJ policy path.
- Intervention risk: Finance Minister ready to intervene in FX markets to address excessive yen depreciation, providing a potential floor for moves.
- (Markets reference the above expectations on further BoJ tightening if inflation persists.)
Range
Current levels and context for key pairs:
- JPY/USD: current 0.006312; 3-month average 0.006416; current is 1.6% below the 3-month average; 3-month range 0.006284 to 0.006574.
- JPY/EUR: current 0.005406; 3-month average 0.00551; current is 1.9% below the 3-month average; 3-month range 0.005393 to 0.005670.
- JPY/GBP: current 0.004703; 3-month average 0.004821; current is 2.4% below the 3-month average; 3-month range 0.004679 to 0.005000.
What could change it
- Surprising hawkish BoJ action (additional rate hikes) or hawkish guidance could strengthen the yen.
- Dovish BoJ guidance or inflation undershooting could weaken the yen.
- Concrete FX market intervention or a shift in fiscal policy (budget revisions) could alter the trend.
- Global risk sentiment changes (risk-on or risk-off flows) affecting USD strength or weakness.
