The USD/JPY currency pair traded close to 147.40 during the Asian session on Monday, recovering after registering around 1% losses in the previous session. The rebound highlights renewed US Dollar (USD) demand in early trading. 

However, the upside momentum appears constrained, as investors weigh the hawkish tone from the Bank of Japan (BoJ) alongside shifting Federal Reserve (Fed) policy expectations. In this article, Anthony Gray, broker at Primeber Group, breaks down the topic with clarity and expertise.

BoJ Governor Ueda Hints at Another Rate Hike

At the Jackson Hole symposium over the weekend, BoJ Governor Kazuo Ueda reinforced the view that the Japanese central bank is moving closer to normalizing monetary policy. Ueda stressed that wage increases were spreading from large corporations to small and medium-sized enterprises (SMEs), an important condition the BoJ has long identified as a prerequisite for policy tightening.

According to Reuters, Ueda noted that tight labor market conditions are likely to accelerate the pace of wage growth across Japan. This backdrop increases confidence that the BoJ’s accommodative stance could gradually shift toward a more hawkish monetary policy.

Market participants were particularly attentive to these remarks because they align with the BoJ’s recent communications emphasizing that sustainable wage growth and stable inflation above 2% are necessary triggers for further interest rate hikes.

Inflation in Japan Remains Above Target

Supporting Ueda’s optimism, Friday’s economic data revealed that Japan’s core inflation slowed for the second straight month in July but still held above the 2% target. The nationwide core Consumer Price Index (CPI), which excludes volatile fresh food prices, increased 3.1% year-on-year, slightly above the 3.0% median forecast.

This reading underscores that inflationary pressures remain persistent, even as the pace of growth moderates. The combination of above-target CPI and tightening labor markets bolsters the case for the BoJ to continue its gradual exit from ultra-loose policy.

Such a backdrop could limit USD/JPY upside in the near term, as traders factor in the possibility that the Japanese Yen (JPY) will regain ground if the BoJ delivers another rate hike later this year.

US Dollar Faces Pressure from Fed Policy Outlook

At the Jackson Hole symposium on Friday, Fed Chair Jerome Powell struck a cautious tone, highlighting that risks to the US labor market are increasing. Powell acknowledged that while inflation remains a concern, the Fed may need to balance its fight against inflation with rising signs of labor market softening.

Importantly, Powell did not pre-commit to future policy decisions, emphasizing that the Fed will continue to be data-dependent. Nonetheless, markets interpreted his comments as tilting dovish, reinforcing speculation that the Fed could cut rates as early as September.

The shift in Fed expectations contrasts with the hawkish tilt from the BoJ, narrowing the monetary policy divergence that has underpinned USD/JPY’s recent strength.

Market Reaction and Technical Outlook

The USD/JPY pair rebounded to around 147.40 in Monday’s Asian trading, regaining some ground after last week’s decline. Still, the upside momentum appears capped near the 147.50–148.00 resistance zone, where sellers may re-enter the market.

From a technical analysis perspective, sustained price action below 148.00 could indicate waning bullish momentum. Key support levels are seen around 146.50 and then 145.80, where buyers may attempt to defend positions. 

On the upside, a breakout above 148.00 could open the door to a retest of the psychological 150.00 mark, although this may require a significant shift in Fed sentiment or weaker JPY fundamentals.

Broader Macro Backdrop

The current USD/JPY dynamics highlight a broader macro theme: the gradual convergence of BoJ and Fed policy paths.

• In Japan, the BoJ is cautiously transitioning from decades of ultra-loose policy, supported by structural wage improvements and sticky inflation.
• In the US, the Fed is moving toward an easing bias, with markets increasingly pricing in a rate cut by September amid signs of labor market fragility.

This shifting divergence reduces the incentive for investors to continue favoring the USD over the JPY, creating conditions for potential JPY appreciation in the medium term.

Conclusion

The USD/JPY pair finds itself at a critical juncture. Trading around 147.40, the pair has rebounded from last week’s losses but faces strong headwinds from BoJ hawkish rhetoric. Governor Ueda’s remarks about wage growth and inflation reinforce expectations of another BoJ rate hike, while recent data confirm inflation remains above target.

At the same time, the US Dollar outlook is clouded by speculation of a September Fed rate cut, following Powell’s acknowledgment of rising labor market risks. The contrasting trajectories of the BoJ and Fed could cap USD/JPY upside and even pave the way for a deeper correction if policy expectations shift further.