- Yen strengthens as fiscal caution and weak GDP delay BOJ hike expectations.
- Markets watch BOJ board nominations for clues on 2026 policy direction.
- USD/JPY consolidates near 153 with 151 downside target in focus.
For most of last week, the Japanese yen gained against the US dollar. This happened after the new government signaled a cautious approach toward large fiscal stimulus plans.
The ruling majority has strong public support and the power to shape fiscal policy. However, financial markets will closely monitor spending levels, especially if public expenses begin to rise too quickly.
At the same time, weaker-than-expected growth in the fourth quarter of 2025 has delayed expectations for the next interest rate hike, which is now seen as unlikely before June.
From a technical perspective, selling pressure on has slowed again near the 153 yen per dollar level. After a short period of consolidation around this area, the next move in the exchange rate should become clearer.
Japan’s New Majority Faces Crucial Policy Choices
Although the new government has given some reassuring signals about fiscal stimulus, the issue is likely to return. Weaker economic growth and the limited impact of earlier stimulus packages could increase pressure for more support.
If the government moves toward a looser fiscal policy again, the Japanese yen could come under pressure in the short to medium term.
At the end of February, the government will be able to nominate two of the ten members of the Bank of Japan’s board. These appointments will offer clues about the direction of monetary policy in 2026.
Etsuro Honda, an economic adviser to Japan’s prime minister Sanae Takaichi, recently outlined the government’s thinking. He said the government does not need to appoint very dovish members to the central bank, despite market expectations. Japan is moving out of a long period of deflation, and inflation remains above target, which policymakers must consider when making decisions.
Troubling Data from Japan
The latest data from the Japanese economy was clearly disappointing in both year-on-year and quarter-on-quarter terms.
This is the second straight reading that has come in below expectations. It raises doubts about the strength of the economic recovery and supports the view that the Bank of Japan may delay its next interest rate hike until at least June.
Against this backdrop, the inflation data due on Friday will be especially important for shaping market expectations.
If the forecasts are confirmed, would continue moving closer to 2%. That would give the market another reason to expect the Bank of Japan to delay any further rate changes.
The recent decline in USD/JPY shows short-term strength in the Japanese yen, as the latest downward move quickly erased the previous upward wave. The pair is now consolidating around 153 yen per dollar, with traders waiting for a clear breakout in either direction.
If sellers push the pair below the level now being tested, the next target would likely be around 151 yen per dollar.
On the other hand, a strong upward breakout could support the formation of a double bottom pattern. However, given the current technical setup, that scenario appears less likely for now.
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