Key takeaways
- USD/JPY rebounded sharply from 140.00 to 148.65 but quickly reversed, showing signs of a failed bullish breakout amid profit-taking and technical resistance.
- The Bank of Japan held rates steady and cut its growth forecast, reinforcing expectations of a slower pace of policy normalization in 2025.
- US-Japan 10Y and 2Y yield spreads continue to narrow, putting downside pressure on USD/JPY and signalling weakening dollar-yen fundamentals.
- Bearish momentum resurfaced in USD/JPY, but a break above 149.00 would invalidate the bearish scenario and open the door to 151.30–154.50.
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This is a follow-up analysis of our prior report “USD/JPY Outlook: Relief bounce in US dollar before yen strength resumes”, dated 17 April 2025.
Since our last publication, the USD/JPY has staged an initial push down to test the first medium-term support zone of 140.30/140.00, as highlighted (it printed an intraday low of 139.89 on 22 April).
Before the expected relief US dollar bounce took shape, the USD/JPY rallied by 4.4% to hit an intraday high of 145.93 on 2 May. A US dollar setback occurred, causing it to slide towards an intraday low of 142.35 on 6 May.
A pause in JPY strength due to BoJ and risk-on sentiment
The initial two weeks of US dollar strength against the Japanese yen have been reinforced by the recently concluded Bank of Japan (BoJ) monetary policy decision meeting last Thursday, 1 May. The BoJ switched into a “dovish hold” stance by keeping its short-term policy interest rate unchanged at 0.5% but slashed its current fiscal year growth forecast to 0.5% from 1.1%, citing trade tariff uncertainty.
However, the Japanese yen’s strength against the US dollar was short-lived as the USD/JPY managed to propel higher by 4.4% to hit a high of 148.65 on Monday, 12 May, triggered by a renewed bout of risk-on sentiment over the growing optimism of US-China trade tensions de-escalation.
BoJ’s normalisation monetary policy is likely to be less hawkish
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Fig 1: Japan implied forward short-term interest rate curve as of 15 May 2025 (Source: Macro Micro)
Market expectations for Bank of Japan rate hikes in 2025 have softened compared to three months ago. The forward-implied short-term policy rate, derived from interest rate futures, has shifted lower, now projected at 0.66% by December 2025, down from 0.83% previously. However, this remains slightly above the 0.57% level seen just a month ago (see Fig 1).
However, other factors can support a potential resurgence of Japanese yen strength.
US Treasuries-JGBs yield spreads remain below key resistances
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Fig 2: 10-YR & 2-YR yield spreads of US Treasuries/JGBs medium-term trends as of 16 May 2025 (Source: TradingView)
Since 6 January 2025, the 10-year and 2-year yield spreads of the US Treasury notes over Japanese Government Bonds (JGBs) have continued to narrow (trended downwards) below their respective key medium-term pivotal resistances of 3.60% and 3.84%, respectively.
If their downward trajectory remains intact, the 10-year and 2-year yield spreads of the US Treasury notes over JGBs may see further downside towards 2.47% and 2.90% next, which in turn may trigger further downside pressure on the USD/JPY (see Fig 2).
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A failure bullish breakout in the USD/JPY technical chart
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Fig 3: USD/JPY medium-term trend as of 16 May 2025 (Source: TradingView)
The USD/JPY’s swift intraday rally of 2.1% seen on Monday, 16 May, is the best single-day gain of the USD/JPY since 17 June 2022.
Interestingly, the bullish momentum of the US dollar’s strength was short-lived, and the USD/JPY staged a decline of -2.5% to print an intraday low of 144.92 on Friday, 16 May at the time of writing, which wiped out its initial gains (see Fig 3).
In addition, the price actions of the USD/JPY have reintegrated back below its 50-day moving average and the medium-term descending trendline from its 10 January 2025 swing high, coupled with a bearish momentum condition being flashed out on its daily RSI momentum indicator.
Hence, the rally of 16 May is likely considered a “head fake” failure bullish breakout. Watch the 149.00 key medium-term pivotal resistance (also the key 200-day moving average), and a break below the 144.10 key intermediate support may see further weakness on the USD/JPY to retest 140.30/140.00 medium-term support in the first step before exposing the next medium-term supports at 138.90 and 137.10/136.50.
On the other hand, a clearance above 149.00 invalidates the bearish scenario for a recovery towards the next medium-term resistances at 151.30 and 154.50.
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