USD/JPY Price Outlook for 2025: Traders Brace for Volatile Year Amid Diverging Interest Rates, Trump Developments

• The Federal Reserve continues to be the main influence on USD/JPY and may pause its rate-cutting cycle in 2025.
• Bank of Japan officials are likely to avoid significant rate hikes.
• Political uncertainties are expected to add volatility to this currency pair, highlighting the competition between safe-haven currencies.

The USD/JPY pair has seen a movement of over 2,200 pips in 2024, fueled by differing monetary policies from central banks on either side of the Pacific. In 2025, volatility could rise even more due to a potential reversal in this divergence and a more unpredictable geopolitical landscape, adding further pressure on the pair.

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A Year of Uncertainty for the Japanese Yen: Central Bank Policy Divergence and Domestic Political Unrest

The Japanese Yen (JPY) experienced significant volatility in 2024, plunging sharply against the US Dollar (USD) in the first half of the year before partially recovering. Below are the key factors that influenced the Yen’s movements in 2024.

On March 19, the Bank of Japan (BoJ) ended its negative interest rate policy, setting rates at 0%. BoJ Governor Kazuo Ueda raised borrowing costs in response to inflation, which had arrived in Japan much later than in other countries.

A successful wage increase campaign during Japan’s annual Shuntō collective bargaining season was the final factor that ended the era of negative interest rates.

Summer Surge Pushes USD/JPY Above 160

Despite the Bank of Japan’s (BoJ) actions, the Yen weakened, partly due to the Federal Reserve’s reluctance to lower interest rates. On July 3, USD/JPY reached its highest point of the year at 161.95.

This was followed by a swift decline, sparking speculation of potential intervention by Japan’s Ministry of Finance (MoF). The reason for the drop was clarified later in the month when the BoJ raised interest rates once more, setting them at 0.25%.

A deep dive before autumn causes it to fall below 140

During his Jackson Hole speech in late August, Fed Chair Jerome Powell caused the US Dollar to drop significantly by hinting at an upcoming rate cut in September.

The Federal Reserve then shocked markets with a 50 basis point (bps) rate cut in its initial move. This caught the market off guard just before the announcement, pushing the USD/JPY pair to its lowest point of the year, dropping below 140.

Three key political pressure points

In addition to the central bank’s actions, the Japanese Yen was also influenced by a series of geopolitical events.

Firstly, the ongoing conflict in the Middle East occasionally bolstered the Yen, as it was viewed as a safe-haven currency. However, the impact of the regional unrest has been waning over time.

Secondly, the surprise election of Shigeru Ishiba as Japan’s Prime Minister gave a temporary boost to the Yen, as his opponent was perceived as more dovish. However, Ishiba’s decision to call snap elections in October, which resulted in his party losing its majority, introduced political instability and led to a weakening of the Yen.

Lastly, Donald Trump’s victory in the 2016 US presidential election propelled the US Dollar higher, driven by expectations of increased tariffs and rising interest rates.

READ MORE – Geopolitical Tensions 2025: Market Risks and Insights

Political Factors Influencing USD/JPY in 2025

Politics is expected to have a greater influence in 2025, primarily due to the new Trump administration, along with political instability in Japan.

Trump’s Tariffs, Reliance on Musk, and Their Impact on Japan

The US Dollar surged when Trump won the US election—throughout his campaign, he frequently emphasized “tariffs” as his key strategy. Implementing tariffs would increase the costs of imported goods, compelling the Federal Reserve to raise interest rates to combat inflation.

The tariff policy warrants closer scrutiny. Trump and his team view tariffs not just as an end goal, but also as a tool to pressure both allies and adversaries into adopting his desired policies. For instance, he threatened Mexico and Canada with 25% tariffs on all goods unless they addressed immigration issues.

During his previous term, Trump brokered a deal with China that required the country to purchase American products, aiming to reduce the US trade deficit. He may seek a similar agreement in the future.

The incoming president owes part of his success to Elon Musk, the world’s wealthiest individual and the founder of companies like Tesla, which relies heavily on production and sales in China. Musk has cultivated a unique relationship with Beijing.

In this scenario, the US Dollar may weaken against certain currencies, but not against the Yen. Why? Because the Japanese Yen is considered a safe-haven asset, particularly sensitive to geopolitical tensions in Asia. If tensions between the US and China were to ease, the Yen would likely depreciate.

Japanese politics is likely to have a more significant influence on the Yen

Governments influence currencies through their fiscal policies, and in Japan, they also directly affect the Yen by intervening in foreign exchange markets, either to weaken or strengthen the currency. While the Bank of Japan (BoJ) carries out the actual buying or selling, these actions are done on behalf of the Ministry of Finance (MoF).

The ruling Liberal Democratic Party (LDP) currently lacks a majority in parliament, which could force the government to call for new elections. A decisive victory for the LDP would provide political stability and potentially bolster the Yen.

However, if the opposition manages to unite and regain power, there may be opportunities for fiscal expansion, which could put downward pressure on the currency.

Monetary policy moving in opposition to current trends

Despite the increasing influence of politics, monetary policy remains the primary driver in currency trading. As noted, the Fed reduced borrowing costs in 2024, while the BoJ increased them. Here’s why this trend could reverse in 2025.

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The Fed may maintain high interest rates due to the strength of the US economy

The US economy is performing well, as reflected by both economic data and Americans’ reports on their well-being. While many express dissatisfaction with the current state of affairs and desire lower prices, consumer spending remains strong.

As of late 2024, the unemployment rate is near 4%, and inflation is approaching the Federal Reserve’s 2% target. The US continues to lead in economic growth among developed nations, widening the gap with its peers.

Will this trend change in 2025? The economy is expected to stay strong, largely unaffected by Trump’s policies. Advancements in artificial intelligence (AI) are set to contribute to productivity gains, and the US is particularly well-positioned to capitalize on these technological developments.

USD/JPY Technical Analysis: The uptrend appears strong

The USD/JPY pair remains in a long-term uptrend, as indicated by the weekly chart. The pair has surged above the 50-week Simple Moving Average (SMA), and the Relative Strength Index (RSI) is above 50. Additionally, the 200-week SMA is clearly showing an upward trend.

Resistance is found at 158.26, the late 2024 peak, followed by 161.98, the yearly high. Beyond this level, the next key target is 170.43, which aligns closely with the 138.2% Fibonacci extension of the yearly range from 138.73 to 161.81.

Support levels are at 148.82, the higher low from late 2024, followed by 139.73, the yearly low. Further support can be found at 136.50, with a deeper level at 127.12.

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Conclusion

USD/JPY is expected to start the year with a sharp decline, driven by fears of trade wars following Trump’s entry into the White House and expectations of continued rate cuts by the Fed.

However, the outlook turns bullish beginning in the spring. While Trump’s unpredictable nature could influence market sentiment, it’s anticipated that he will secure deals he will present as successes—agreements that will help stabilize global trade. This would likely pressure the safe-haven Yen.

Moreover, USD/JPY is forecasted to rise in the latter half of the year, buoyed by a more hawkish Fed policy and growing frustration with the Bank of Japan’s reluctance to implement rate hikes.