• Japanese Yen retreats from a three-month high set against the USD on Tuesday.
• Fiscal worries, political uncertainty, and a positive risk tone undermine the JPY.
• The divergent BoJ-Fed outlooks cap USD/JPY ahead of the key FOMC decision.

The Japanese Yen (JPY) remains on the back foot amid a rebounding US Dollar (USD) heading into the European session as bulls pause for a breather following a three-day rally to a nearly three-month high, touched the previous day. Investors remain worried about Japan's fiscal health on the back of Prime Minister Sanae Takaichi's aggressive spending and tax cut plans. Apart from this, domestic political uncertainty ahead of a snap election on February 8 and a positive risk tone turn out to be key factors undermining the safe-haven JPY.

The JPY bears, however, seem hesitant amid speculations that authorities would intervene to stem further weakness in the domestic currency. Moreover, minutes from the Bank of Japan's (BoJ) December meeting showed that members agreed on the need to continue raising interest rates, which further helps limit the JPY losses. Meanwhile, the BoJ's hawkish outlook marks a significant divergence in comparison to bets for more rate cuts by the US Federal Reserve (Fed). This further supports the lower-yielding JPY ahead of the Fed decision.

Japanese Yen drifts lower as fiscal woes, political uncertainty counter hawkish BoJ, safe-haven flows

• Minutes of the Bank of Japan's December policy meeting, released this Wednesday, showed that the board judged the economy to be recovering moderately, albeit with pockets of weakness. The minutes further revealed that policymakers were becoming more confident that Japan is sustaining a moderate wage–price cycle, and were using that assessment to justify another step toward less accommodative policy.
• The remarks highlighted the central bank's readiness to continue pushing up still-low borrowing costs. A few board members, however, said the central bank must be mindful of the impact a weak Japanese Yen could have on underlying inflation in deciding when to raise interest rates again. This, along with nervousness over Japan's fiscal outlook and political uncertainty, prompts some selling around the JPY.
• Japan's Prime Minister Sanae Takaichi pledged to abolish sales tax on food items for two years as part of her campaign ahead of a snap lower house election on February 8. Given that Japan's gross government debt has exceeded 200% of GDP for the past 15 years, Takaichi's spending and tax cut plans fueled concerns about a deterioration in Japan’s public finances. This further drags the JPY lower on Wednesday.
• The US Dollar, on the other hand, stages a goodish recovery from a four-year low, touched on Tuesday, as bears opt to lighten their bets ahead of the highly-anticipated Federal Reserve rate decision later today. The focus, however, will be on the post-meeting press conference, where comments from Fed Chair Jerome Powell will be scrutinized for cues about the rate-cut path and influence the USD demand.
• Nevertheless, traders are still pricing in the possibility that the US central bank would lower borrowing costs two more times in 2026. Adding to this, concerns over the Fed’s independence, along with heightened economic and policy risk linked to US President Donald Trump's trade and geopolitical decisions, should cap gains for the USD and the USD/JPY pair amid the divergent BoJ-Fed outlooks.

USD/JPY bearish technical setup backs case for emergence of fresh selling at higher levels

The overnight sustained breakdown through the 100-day Simple Moving Average (SMA) and a close below the 154.00 mark was seen as a fresh trigger for the USD/JPY bears. Spot prices hold beneath the said support levels, keeping the near-term tone heavy despite the broader uptrend. The Moving Average Convergence Divergence (MACD) line stands below the Signal line and under the zero mark, with a widening negative histogram that reinforces bearish momentum.

The Relative Strength Index (RSI) prints at 30.94 (oversold), which could allow for a pause or a corrective bounce. Measured from the 140.12 low to the 159.19 high, the 38.2% retracement at 151.91 offers initial support, and a break lower would extend the slide.

Should downside persist, the pullback would open the 50.0% retracement at 149.66 as the next support layer within the broader advance. A contraction in the MACD’s negative histogram and a bullish crossover would soften the bearish bias, while an RSI recovery above 30 would corroborate stabilizing momentum. Reclaiming levels above the rising 100-day SMA would ease pressure and shift focus back to upside retracements in the sequence.

(The technical analysis of this story was written with the help of an AI tool.)