The USD/JPY pair is experiencing a noticeable decline toward the 158 level at this sensitive stage, a development I view as a natural outcome of the convergence of multiple economic and geopolitical factors occurring simultaneously, rather than merely a temporary corrective move. In my view, the pair’s move toward the 157.85 area primarily reflects the broad-based weakness currently affecting the US dollar, driven by escalating trade tensions between the United States and the European Union. This has brought back to market memory the scenarios of trade wars that have historically weighed on global risk appetite and weakened the US currency in previous cycles.
I believe that the recent drop in the US Dollar Index below 99.20 is not just a technical event, but a fundamental signal that markets have begun to reprice the political and economic risks associated with US protectionist policies. The imposition of new 10% tariffs on European Union countries and the United Kingdom, in a politically sensitive context, reinforces my concerns that the US administration could push the global economy into a phase of heightened trade uncertainty. Such an environment undermines the dollar’s status as a dominant reserve currency and encourages investors to diversify their positions away from it.
From my reading of the currency performance heatmap, it is evident that dollar weakness is not limited to the Japanese yen alone, but extends against most major currencies. This confirms that the current pressure on the dollar is broad in nature rather than being confined to the USD/JPY pair specifically. Nevertheless, the Japanese yen appears to be a relative beneficiary of this environment, despite domestic challenges, due to its traditional role as a safe-haven currency during periods of geopolitical and trade-related stress. In my assessment, this factor will continue to support the yen in the short term, even if gains remain limited by counteracting domestic factors.
At the same time, the Japanese political dimension cannot be ignored. I believe that Prime Minister Sanae Takaichi’s announcement of her intention to dissolve the House of Representatives and call for snap elections on January 23 introduces an additional layer of uncertainty that constrains yen strength. Markets typically dislike political surprises, especially when they involve potential shifts in fiscal policy. Takaichi’s remarks about ending what she described as excessively tight fiscal policy open the door to the possibility of greater fiscal expansion, which could place medium-term pressure on the yen if accompanied by rising debt levels or increased government spending without clear structural reforms.
In my opinion, the current equilibrium in the USD/JPY pair is the result of a tug-of-war between external US dollar weakness and internal Japanese political uncertainty. This dynamic explains why we have not yet seen a sharp breakdown below the 157 level, despite the negative momentum surrounding the dollar. Investors, from my perspective, remain cautious and are closely watching upcoming Bank of Japan decisions, which are likely to be the decisive factor in determining the pair’s next directional move.
I see the upcoming Bank of Japan meeting this week as a pivotal event. Expectations that interest rates will be kept unchanged at 0.75% reflect the central bank’s continued cautious stance, which I consider justified given the fragility of Japan’s economic recovery. However, even a verbal hint toward future tightening or a review of yield curve control could trigger a renewed wave of yen strength, potentially pushing the USD/JPY pair to break below current support levels.
In my estimates, over the short term, the pair is likely to remain under downward pressure as long as the US dollar continues to suffer from the repercussions of trade tensions and political uncertainty in Washington. I expect USD/JPY to trade within a range between 156.80 and 158.50 in the coming days, with a clear bearish bias should additional negative signals emerge from the US side or if the Bank of Japan delivers unexpectedly hawkish surprises.
Over the medium term, my outlook becomes more cautious. If the trade dispute between the United States and the European Union escalates into reciprocal retaliatory measures, the dollar could face deeper structural weakness, which would favour the yen despite Japan’s internal challenges. Conversely, if the Japanese elections result in a government more inclined toward fiscal expansion without parallel monetary support, renewed pressure on the yen could emerge, limiting its ability to fully capitalize on dollar weakness.
Ultimately, my view is that the USD/JPY pair stands at a critical crossroads, driven by politics as much as by economic fundamentals. The current phase, in my opinion, is not suitable for one-directional bets, but rather requires disciplined risk management and close monitoring of political and monetary developments on both sides of the Pacific, as any sudden shift in rhetoric or policy decisions could completely reshape the landscape within a short period of time.
