The USD/JPY pair has been rising amid a broader depreciation of the Japanese yen. This week, the pair has increased by almost 300 pips and tried to consolidate around the 157 figure. Just last week, USD/JPY bears approached the 152 level (with a weekly low at 152.11).
Such a sharp reversal is attributed to several fundamental factors. First, inflation in Japan has begun to slow. This fact reduces the probability that the central bank will raise interest rates in the near future. Second, the yen is under pressure due to the upcoming elections for the lower house of the Japanese parliament.
These are the main factors exerting pressure on the yen. Additional support for USD/JPY buyers comes from the greenback, which is strengthening amid the weakening of "dovish" expectations regarding the Fed's future actions. Nevertheless, the primary driver of growth remains the US dollar.
Let's start with inflation. At the end of January, data on the nationwide CPI growth for December was published in Japan. The report showed a significant slowdown in consumer price growth to 2.1% year-on-year. This is the lowest level since March 2022, after rising to 2.9% the previous month. Additionally, the core inflation indicator (excluding volatile food prices) fell to 2.4%, indicating a reduction in price pressure amid declines in energy, gas, and food prices.
Last Friday, inflation data for Tokyo in January was published. It became apparent that the consumer price index in the Japanese capital had once again slowed down—this time sharply—to 1.5%, down from 2.0% the previous month. Most analysts had predicted a more modest decline to 1.7%. This indicator has been decreasing for the third consecutive month, reaching nearly a four-year low (the lowest value since February 2022).
The core TCPI, excluding fresh food prices, also came in the red zone, falling to 2.0% against a forecast drop to 2.2% (from the previous level of 2.3%). This is a multi-month low—the lowest value for the indicator since October 2024.
Tokyo's inflation is considered a "precursor" to national inflation in Japan. First, the Tokyo CPI is released about 3-4 weeks earlier than the national CPI. Second, the high representativeness of the indicator plays a role, as Tokyo is the country's largest agglomeration with a high share of services, rentals, transportation, and food consumption (these categories often reflect changes in price pressure first).
In other words, the Tokyo CPI accurately predicts the direction of the "primary" indicator. If inflation in Japan's capital slows or accelerates, there is a high probability that national inflation will follow suit. Therefore, USD/JPY traders reasonably interpreted last Friday's report as unfavorable for the yen. A slowdown in inflation reduces the likelihood of the Bank of Japan raising interest rates in the near term. Following the January meeting, the central bank raised its forecasts for economic growth and inflation but expressed readiness to tighten monetary policy only if "macro data justifies such moves." However, the central bank did not announce a rate increase and instead used cautious wording.
The second factor putting pressure on the yen is Sanae Takichi. As is known, the leader of the ruling Liberal Democratic Party has dissolved the lower house of parliament and called for early elections, scheduled for February 8, this coming Sunday.
Recent polls suggest that the LDP could secure a decisive majority in the elections (around 300 out of 465 seats). In this case, the ruling party will not depend on coalition partners (before the dissolution of parliament, it operated in coalition with the "Japan Innovation Party"). This means that Takichi will be able to form a government independently and pass laws through the lower house.
The yen responded negatively to such prospects, considering the recent statements and initiatives of the head of government. In particular, she recently effectively supported the devaluation of the national currency by stating that a weak yen could be a "great opportunity for export sectors amid high tariffs from the US and global trade barriers." Although Takichi later clarified that she did not intend to directly influence the national currency's exchange rate dynamics, markets interpreted her words as a signal that the government might be more tolerant of a weaker yen than of a stronger one.
Takichi's pre-election initiatives exert additional pressure on the Japanese currency. In particular, the prime minister promised to suspend the collection of the 8% consumption tax on food for two years if her party wins the early elections.
Effectively, Takichi announced a course toward a more lenient fiscal policy, which could increase the budget deficit and thereby prolong the period during which interest rates remain at current levels longer than previously expected. The expansion of fiscal policy will occur at a time when Japan's national debt is already among the highest in developed countries. In these conditions, fulfilling the prime minister's pre-election promises could lead to rising yields on government bonds and, consequently, intensify pressure on the yen.
Given that the outcome of the early elections is largely predetermined, the market anticipates the implementation of Takichi's policies under the absolute control of the lower house of the Japanese parliament.
Thus, the established fundamental background supports further growth in USD/JPY. The technical picture also points to a preference for a northern scenario. On all "higher" timeframes (from H4 and above), the pair is positioned between the middle and upper lines of the Bollinger Bands indicator. On the 4-hour chart, the Ichimoku indicator has formed one of its strongest bullish signals, the "Parade of Lines." The immediate (and currently primary) target for the upward movement is the 157.50 level, which is the upper Bollinger Bands line on the H4 timeframe.
