Japanese Yen Outlook: Fed Uncertainty Complicates USD/JPY Upside

USD/JPY remains supported by structural drivers favoring yen weakness, but renewed concerns around Federal Reserve independence have introduced fresh uncertainty into the bullish narrative. While Japanese political risks and resilient US labor data continue to lean the balance higher, repeated failures near key resistance raise questions over how sustainable further upside may be in the near term.

Powell Headlines Shake Confidence in Fed Independence

Markets were unsettled after Fed Chair Jerome Powell revealed that the Department of Justice served the Federal Reserve with grand jury subpoenas late last week. The potential indictment relates to Powell’s June testimony before the Senate Banking Committee concerning the Fed’s building renovation project.

Powell characterized the move as political pressure, reaffirming that monetary policy decisions remain grounded in economic evidence rather than political influence. Even so, the development has reignited broader concerns around Fed independence at a sensitive point in the cycle. Any perception that policy decisions are being shaped by intimidation rather than data risks distorting rate expectations, front-end yield pricing, and the dollar more broadly.

The situation is further complicated by leadership uncertainty. Powell’s term as Fed Chair expires in May, though his position as a Governor runs through January 2028, allowing him to remain on the Board even after a successor is appointed. This has already become a point of contention, with some officials arguing he should step down entirely. With an announcement on the next Fed Chair expected soon, potentially around the World Economic Forum in Davos, political risk is now firmly embedded in the rate outlook.

Japanese Politics and US Rates Still Lean Against the Yen

Prior to the Powell developments, USD/JPY had been advancing on a combination of Japanese political risk and firmer US rate expectations, trading near levels last seen in early 2025.

In Japan, Prime Minister Sanae Takaichi’s reflationary stance continues to weigh on the yen. Her policy preferences echo those of the Abe era, favoring aggressive fiscal support. With approval ratings reportedly near 70%, markets are increasingly focused on the risk that a strong electoral outcome could open the door to fresh stimulus, even without full parliamentary control.

Speculation around a possible lower house election in early to mid-February has added to yen weakness, particularly in thin holiday liquidity. At the same time, the risk of official intervention remains elevated if the pace of depreciation accelerates, as authorities have historically responded more to speed than to specific price levels.

On the US side, December labor data delivered a mixed headline but a firm underlying message. While payroll growth slowed, the unemployment rate fell to 4.4% and wage growth accelerated to 3.8% year on year. These components matter most for the Fed’s inflation and policy outlook and have driven a modest repricing higher in short-dated US yields.

Markets have trimmed expectations for Fed easing this year from roughly 60 basis points to around 50, helping support the dollar. The tight correlation between USD/JPY and Fed funds futures over recent weeks highlights how sensitive the pair remains to shifts in US rate expectations.

Technical Picture: Bullish Bias, But Breakout Still Elusive

The interplay of these forces has left USD/JPY caught between supportive fundamentals and rising political uncertainty. Japanese election risk, firm US labor conditions, and steady risk appetite continue to favor buying dips, while Fed independence concerns have tempered enthusiasm for chasing breakouts.

Technically, the pair remains within an ascending triangle formation, suggesting the potential for a continuation higher. However, repeated failures above the November 2025 high at 157.90 have become increasingly notable. Each rejection adds doubt to the immediacy of a sustained breakout, even as the broader structure remains constructive.

For now, dip-buying remains favored. A decisive break and daily close above 157.90 would reopen the door for fresh long exposure, with initial upside toward the 2025 high at 158.88. Beyond that, attention would turn to 160.23 and 161.95, levels that align with prior Bank of Japan intervention zones.

Momentum indicators continue to support this bias. RSI remains above the neutral 50 level without entering overbought territory, while MACD has delivered a bullish crossover in positive territory and continues to trend higher.

If the recent pullback extends, near-term support levels to monitor sit at 157.00 and 156.00, both of which have acted as magnets in recent sessions. Additional downside protection comes from rising trend support drawn from the October lows and the 50-day moving average, ahead of more meaningful support near 154.45.

Overall, USD/JPY remains biased higher, but political uncertainty surrounding the Fed has clearly complicated the path forward, increasing the importance of confirmation above key resistance before assuming a sustained extension.