Yen Faces Dual Pressures from BoJ Caution and Euro Carry Trades

The Japanese yen is currently navigating a complex landscape shaped by the Bank of Japan's cautious stance on interest rate hikes and shifts in global carry trade dynamics. The Bank of Japan (BoJ) has shown no urgency in raising interest rates, despite inflation in Tokyo climbing back above its target. In September, consumer prices accelerated from 1.8% to 2.7%, surpassing the 2.3% increase forecasted by Bloomberg economists. However, the BoJ's latest meeting minutes did not provide clear signals about continuing its monetary tightening cycle, which has fueled the rally in the USD/JPY pair.

Speculators have recently closed their long positions on the yen and shifted back to short positions, contributing to the upward momentum of the USD/JPY. The wide yield spread between US and Japanese bonds, driven by the Federal Reserve and the BoJ moving at a similar pace, is expected to keep the USD/JPY on an upward trajectory. The futures market assigns a 95% probability that borrowing costs will remain at their current level, despite inflationary pressures.

An unexpected factor limiting the USD/JPY's rapid rise is the euro. The euro is increasingly being used as a funding currency for carry trades, reducing the selling pressure on the yen. The EUR/JPY's decline to its lowest level since autumn 2025 has prompted traders to adjust their positions, easing the selling pressure on the yen. This dynamic has resulted in a smoother and more gradual advance of the USD/JPY, with regular pullbacks.

For traders, the outlook remains bullish on the USD/JPY, with targets set at 159.5 and 160.9. The analysis is based on fundamental factors, including official statements from financial institutions, geopolitical and economic developments, and historical market data. As long as the US-Japan bond yield spread remains wide, the USD/JPY is likely to continue its upward trajectory, making buy-on-pullbacks a viable strategy.