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Fiscal Expansion Coupled with Yield Distortion, JPY’s Structural Weakness May Persist Into 2026
Forex
Summary:
Officials of the Bank of Japan (BOJ) stated that monetary policy will remain on an upward trajectory. The Japanese yen’s structural weakness is expected to persist into 2026.
Buy
TradingUSDJPY
EXP
156.641
Entry Price
161.070
TP
154.000
SL
156.658 +0.239 +0.15%
0
Point
Flat
154.000
SL
CLOSING
156.641
Entry Price
161.070
TP
Fundamentals
The Japanese yen’s struggle to stage a substantive rebound has become a key feature of year-end trading. Even the Bank of Japan’s interest rate hike in December failed to provide sustained support, highlighting the entrenched strength of bearish positions.
Carry trade dynamics remain crucial. Despite lingering valuation concerns, the Nikkei Index has maintained a strong upward momentum year to date, driven by optimism surrounding Prime Minister Sanae Takaichi’s new administration and sustained enthusiasm for artificial intelligence and tech stocks.
The scale of this rally is remarkable. Surging from around the 30,000-point mark in April, the Nikkei Index broke through 50,000 points in early November to hit an all-time high, registering one of the strongest gains in decades. Although the market has seen some volatility since November, the index has so far stabilized within a wide range around the 50,000-point level. Such consolidation indicates underlying robust upward momentum, leaving room for another rally early next year.
Meanwhile, fiscal concerns are quietly mounting. Japan’s expansionary budgetary policies have pushed up long-term bond yields. The 30-year Japanese Government Bond (JGB) yield remains near its historical high of 3.4%, while the 10-year JGB yield also hovers above 2%, a multi-decade peak. Even so, yields are still artificially suppressed. Crucially, the Bank of Japan remains a large-scale buyer of government bonds, which effectively caps the rise in long-term bond yields.
As a result, risks that would typically push yields higher, such as fiscal sustainability issues, are instead priced into the Japanese yen. This dynamic exposes the yen to further downside risks in the coming months. Even if the government takes direct intervention measures that go beyond verbal warnings, it will be difficult to deliver lasting relief.
Technical Analysis
In USDJPY trading, the exchange rate has continued to consolidate below 157.88. The intraday trend remains neutral. With the 154.33 support level still holding, the outlook remains bullish. On the upside, a decisive break above the key structural resistance level of 158.85 will serve as a major medium-term bullish signal, with the next target at the 161.94 high. However, a break below 154.38 will shift the trend to bearish, potentially triggering a deeper correction.
Trade Recommendations
Trade Direction: Buy
Entry Price: 156.41
Target Price: 161.07
Stop Loss: 154.00
Valid Until: 16, January, 2026, 23:55:00
Support: 156.04/155.54/154.33
Resistance Levels: 156.73/157.05/157.76
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