The Japanese Yen (JPY) strengthened against the US Dollar (USD), outperforming most G10 currencies as geopolitical uncertainty and risk-off flows dominated. Domestic yields rose to their highest since 1999, supporting the yen, while USD/JPY remains stuck in a flat range between the mid-154s and upper-157s, with limited options activity reflecting muted market sentiment, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD/JPY range-nound as market awaits direction

"The yen is up 0.2% vs. the USD and outperforming all of the G10 currencies in an environment of broad-based risk aversion driven by geopolitical developments and concerns related to Venezuela. Domestic yields have climbed considerably in their first trading day of 2026, with the 10Y yield ending up about 6bpts to 2.12% – their highest level since 1999."

"The rise in JGB yields reflects ongoing concerns about Japan’s fiscal path, and worries about the BoJ’s ability to rein in inflation. US-Japan yield spreads continue to narrow in a JPY-supportive manner, extending their divergence to spot. The options market remains muted however, as we note the absence of any material movement in risk reversals suggesting little change in the (modest) premium for protection against JPY strength."

"In terms of technicals, USD/JPY has been stuck in a flat range since mid-November, roughly bound between the upper-157s and mid-154s. We are neutral absent a break of the range."