The Yen Comes Under Pressure as USD/JPY Breaks Through 156.50—What's Next for the Dollar?

Market Shifts as BoJ’s Cautious Stance Diverges from Global Rate-Cut Cycles

As Asian markets kicked off another trading week, USD/JPY surged toward 156.75, signaling continued weakness in the Japanese currency. The Japanese yen’s depreciation reflects broader market frustration with the Bank of Japan’s measured approach to monetary policy tightening, creating a divergence that continues to favor the usd against its peers.

The divergence became clearer following the BoJ’s December decision to raise its policy rate to 0.75%—the highest level in 30 years—yet the central bank notably stopped short of providing investors with a concrete roadmap for future hikes. This cautious stance disappointed market participants expecting more aggressive action, intensifying selling pressure on the yen.

The Fed’s Expected Path Could Further Weigh on the Yen

In stark contrast to the BoJ’s gradualism, the Federal Reserve is signaling multiple interest rate cuts throughout 2026. This policy divergence—with the Fed potentially loosening while the BoJ tightens only reluctantly—creates an environment where the usd remains supported against the yen, despite longer-term headwinds.

Complicating the picture is the political dimension. Former President Donald Trump has openly advocated for a more accommodative Fed leadership, repeatedly stating his preference for lower interest rates. His public comments about the next Fed Chair have raised questions about central bank independence and what policy direction could emerge when Jerome Powell’s term concludes.

Market Expectations Point to Limited Near-Term Rate Cuts

According to CME FedWatch data, markets are pricing in just an 18.3% probability of a Fed rate reduction at the January meeting. However, traders broadly anticipate two additional cuts by year-end, following the Fed’s three reductions already delivered in the current year. Meanwhile, foreign exchange strategist Yusuke Miyairi from Nomura emphasized that Fed decisions and leadership changes will be the dominant drivers of dollar movements in the first quarter, overshadowing other variables.

The outcome of these competing policy trajectories will likely determine whether USD/JPY continues its ascent or stabilizes at current levels.