USD/JPY forecast: Japanese yen crash could continue

The USD/JPY exchange rate continued rising this week after the Federal Reserve slashed rates, while the Bank of Japan (BoJ) maintained them unchanged. It also rose on Friday after the latest Japan inflation data. The Japanese yen was trading at 158 against the US dollar, up from the September low of 139.55.

Japan’s inflation is rising

The USD/JPY pair rose after Japan’s statistics agency published the latest national inflation numbers on Friday. These numbers revealed that the headline Consumer Price Index rose from 2.3% in October to 2.9% in November. It rose from 0.4% to 0.5% in November. Core inflation, which excludes the volatile food and energy prices rose from 2.3% to 2.9%. 

These numbers came a day after the Bank of Japan (BoJ) left interest rates unchanged at 0.25% because of Donald Trump-related jitters. Most analysts were expecting the bank to hike rates by either 0.10% or 0.25%, to combat the elevated inflation rate. 

Therefore, the rising inflation rate provides an early sign that the BoJ will slash interest rates by 0.25% in the next meeting. 

The BoJ has radically changed its views this year. It abandoned negative interest rates earlier this year when it boosted rates by 0.10%. The bank then followed it up by hiking by 0.25%, a move that triggered a widespread unwinding of the Japanese yen carry trade. 

Japan’s interest rate hikes have a major implication, especially when other central banks are cutting. That’s because it has, for a long time, maintained low interest rates in a bid to boost an economy that has struggled. Higher rates, however, lead to more debt-financing costs because Japan has a debt of over $8 trillion, almost double the GDP.

Federal Reserve decision

The USD/JPY exchange rate rose after the Federal Reserve delivered its interest rate decision. In it, the bank decided to slash interest rates by 0.25% for the third time this year. The cut brought the year-to-date rates to 1%.

The Fed also signaled that it will deliver more cuts in 2025. It expects to cut rates two more times now that it expects inflation to continue rising. The Fed is largely concerned about some of Donald Trump’s policies like tariffs, tax cuts, and deportations. 

These policies, if acted upon, will likely lead to higher inflation in the longer term..For example, a 25% tariff on imports will lead to higher prices almost instantly, without even lowering the country’s trade surplus. 

USD/JPY technical analysis

USD/JPY chart by TradingView

The daily chart shows that the USD/JPY exchange rate has been in a strong rally in the past few days. It has now moved above the key resistance level at 156.74, its highest level on November 15, invalidating the double-top pattern.

The pair has moved above the 23.6% Fibonacci Retracement level and 50-day moving average. Also, the Relative Strength Index (RSI) and other oscillators have tilted upwards, a sign that it has a bullish momentum. 

Therefore, the pair will likely continue rising as bulls target the next key resistance point at 161.87, its highest point this year, On the flip side, a drop below the support at 155 will invalidate the bullish view.

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