USD/JPY Outlook : Yen Weakness Persists Despite Risk Aversion

Summary

The Japanese yen continues to underperform even in conditions that would typically support it, highlighting a clear shift in what is driving price action. Domestic fiscal concerns linked to Japan’s upcoming lower house election are dominating sentiment, while persistent carry demand is adding further pressure. With these forces working together, the broader bias for USD/JPY remains skewed to the upside.

Risk-Off Dynamics Losing Influence

Recent price behaviour has called the yen’s traditional role as a risk proxy into question. Despite elevated risk aversion and broad US dollar weakness, the yen has failed to attract sustained demand. This suggests that global risk sentiment and rate differentials are no longer the primary drivers. Instead, attention has shifted decisively toward Japan’s internal political and fiscal outlook ahead of the February election.

Election Headlines Drive Fiscal Anxiety

Early support for the yen faded after Prime Minister Sanae Takaichi confirmed a snap lower house election scheduled for 8 February. Her proposal to suspend the food consumption tax for two years was quickly met by opposition parties offering even deeper tax cuts, including full abolition. While policy details differ, markets are increasingly pricing in some form of lasting fiscal loosening, keeping pressure on the currency.

JGB Curve Steepening Signals Market Concern

The prospect of fiscal expansion triggered a sharp reaction in the Japanese government bond market. Yields across the curve moved to fresh cycle highs, with selling pressure concentrated in longer maturities. As a result, the 2s10s curve steepened beyond 100 basis points, reflecting rising inflation expectations and growing unease around fiscal sustainability. This backdrop helps explain why USD/JPY reversed higher after an initial dip, given the strong relationship observed between curve dynamics and the pair in recent months.

Carry Flows Reinforce Yen Weakness

Beyond fiscal concerns, ongoing carry demand continues to weigh on the yen. Investors remain comfortable using it as a funding currency for positions elsewhere, reinforcing downside pressure. Unless volatility rises meaningfully, policy guidance shifts, or direct intervention becomes more credible, this dynamic is likely to persist.

Technical Outlook

USD/JPY produced a bullish reversal from below the November 2025 high near 157.90, warning of renewed upside risk despite the signal forming during a US public holiday. A retest of the year-to-date high around 159.45 now comes into focus, with a break opening the door toward 160.23, a level associated with prior Bank of Japan intervention.

If upside momentum fades, initial support is seen at 157.90, followed by 157.50. Below there, the confluence of trend support near 157 and the 50-day moving average represents a more meaningful downside area. Momentum indicators remain above neutral but show signs of slowing, suggesting caution rather than a clear reversal signal.

USD/JPY Daily Chart

Bottom Line

The yen’s inability to strengthen during risk-off conditions underscores how dominant fiscal and political concerns have become. With election-driven uncertainty, a steepening yield curve, and persistent carry flows all weighing on sentiment, the path of least resistance for USD/JPY continues to point higher in the near term.