USD/JPY May Extend Gains Before Yen Recovery Begins

The USD/JPY currency pair may continue its upward trajectory before the yen can stage a meaningful recovery. Recent gains were fueled by a report that Japan's government pension fund skipped allocation discussions in September, which weakened a key support for the yen's earlier rally. Despite hovering around the crucial 158 level, the broader economic environment still favors the US dollar. Haven demand remains strong as the Federal Reserve maintains a hawkish stance and global debt concerns weigh on bond markets.

The technology-driven equity rally at the start of the fourth quarter has reduced demand for traditional safe havens, which limits yen strength despite increasing carry-trade volatility. Buyers are stepping in on dips toward 157, and risk reversals are gradually reducing near-term expectations for further yen appreciation. While intervention concerns and weakness in EUR/JPY due to European fiscal stresses are slowing the advance, they have not reversed the broader uptrend.

In the near term, USD/JPY is likely to challenge its 200-day moving average and potentially test the 159 area before a more sustainable yen recovery takes hold. Longer term, the yen's outlook depends on the pace of Bank of Japan tightening, the Fed's outlook, equity market stability, and incoming economic data. BOJ Deputy Governor Shinichi Uchida noted that the global AI boom has supported financial conditions but warned of potential setbacks if profit expectations prove overly optimistic.

Building long-yen positions as USD/JPY approaches 160 may offer a favorable risk-reward setup, either as the policy outlook turns more supportive for the yen or as a hedge against market turbulence.