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The Japanese Yen (JPY) languishes near a two-week low against a firmer US Dollar (USD) during the Asian session on Thursday and seems vulnerable to prolonging the downtrend witnessed over the past week or so. Investors remain worried about Japan's financial health on the back of Prime Minister Sanae Takaichi's expansionary fiscal plans. This, along with political uncertainty ahead of the snap election on February 8, has been another bearish development for the JPY and contributes to its relative underperformance.

Meanwhile, softer consumer inflation figures from Japan's capital city – Tokyo – released last week tempered bets for an early interest rate hike by the Bank of Japan (BoJ), further undermining the JPY. The USD, on the other hand, climbs to a two-week top and keeps the USD/JPY pair close to the 157.00 mark. That said, bets that the US Federal Reserve (Fed) will cut rates two more times in 2026 might cap the USD. Moreover, speculations that Japanese authorities would step in to stem further JPY weakness warrant caution for bears.

Japanese Yen bulls remain on the sidelines amid fiscal and political woes
 

• The incumbent Japanese Prime Minister Sanae Takaichi’s Liberal Democratic Party (LDP) is poised to score a strong victory in the lower house election on February 8. The outcome would give Takaichi a greater grip on Japan's parliament and more headroom to carry out her expansionary fiscal plans.
• Takaichi pledged to suspend the 8% consumption tax on food for two years as part of her election campaign, raising concerns about Japan’s fiscal outlook amid fears of debt-funded spending. This has been a key factor behind the Japanese Yen's relative underperformance since the beginning of this week.
• Moreover, Takaichi talked up the benefits of a weaker currency during a campaign speech. Although Takaichi later softened the stance, her comments raised doubts over whether authorities would intervene to support the domestic currency. This exerts additional downward pressure on the JPY.
• Meanwhile, data released last Friday showed that the headline Consumer Price Index (CPI) in Japan's capital city – Tokyo – fell last month to its weakest level since February 2022. This pointed to signs of softer demand-driven price pressure and reduced urgency for the Bank of Japan to tighten further.
• However, the Summary of Opinions from the BoJ's January meeting this week highlighted board members' hawkish view amid mounting price pressures from a weak JPY. Moreover, a private survey showed that Japan’s services sector growth accelerated in January at its fastest pace in almost a year.
• This suggests that a BoJ rate hike in the first half of 2026 remains on the table. In contrast, traders are pricing in the possibility of two more interest rate cuts by the US Federal Reserve this year, which caps the USD/JPY pair near the 157.00 mark, or a nearly two-week top set earlier this Thursday.
• In fact, US President Donald Trump said that he would have passed on Kevin Warsh as his nominee to lead the Federal Reserve if he had expressed a desire to hike interest rates. Trump further added that there was not much doubt that the US central bank would lower interest rates.
• The US Dollar, however, has climbed to a fresh high since January 23 in the wake of hawkish comments from Fed Governor Lisa Cook, saying that risks are skewed toward higher inflation. This could support the USD/JPY pair as traders now look to a duo of US labor market reports for a fresh impetus.
• Thursday's US economic docket features the delayed release of the JOLTS Job Openings data, along with the usual Weekly Initial Jobless Claims. This, along with speeches by influential FOMC members, would drive the USD and produce short-term trading opportunities around the USD/JPY pair.

USD/JPY could climb further amid breakout through 156.50 hurdle
 

The overnight breakout through the 156.50 confluence – comprising the 100-period Simple Moving Average (SMA) on the 4-hour chart and the 61.8% Fibonacci retracement level of the 159.13-152.06 downfall – favors the USD/JPY bulls. The Moving Average Convergence Divergence (MACD) stands in positive territory while its histogram contracts, suggesting fading bullish momentum. The Relative Strength Index (RSI) prints 68.92, just below overbought.

This, in turn, suggests that the rebound could extend toward the 78.6% retracement at 157.64, while a rejection near resistance would risk a pullback to the 50% retracement at 155.60. A re-expansion of the MACD histogram and a firm RSI above 70 would strengthen the bullish case; otherwise, momentum looks prone to consolidation below resistance.

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