USD/JPY Holds Near 153.25 as Japan’s Political Shift and Fed Rate Bets Reshape Outlook

On February 8, snap parliamentary elections resulted in the ruling coalition led by Japanese Prime Minister Sanae Takaichi securing a constitutional majority in the lower house, winning 316 out of 465 seats, with voter turnout rising to approximately 56.26%, above the previous election. This mandate enables the government to override vetoes and initiate constitutional amendments even if legislation is rejected by the upper house.

The strengthened political position opens the door to discussions on large-scale fiscal measures, including a temporary two-year suspension of the 8.0% tax on food and alcohol, expanded social programs, and increased defense spending. These prospects have triggered mixed investor reactions due to Japan’s elevated public debt—roughly 2.3 times GDP—and the potential risk of accelerating inflation.

Rising Japanese equity prices, reflected in the Nikkei 225 reaching record highs, indicate an initially positive assessment of the election outcome and expectations of stronger economic activity. Meanwhile, the currency market has responded with increased volatility and yen strength, driven by expectations of a tighter policy stance alongside potential further action from the Bank of Japan.

Last week, traders focused on January corporate goods price data: the index rose from 0.1% to 0.2% month-on-month, while the annual figure eased from 2.4% to 2.3%, in line with analyst expectations. Overall, inflation remains above the Bank of Japan’s 2.0% target, reinforcing expectations of further monetary tightening.

Investors are also assessing fourth-quarter GDP data released today, which showed Japan’s economy expanding by 0.2% year-on-year, rebounding sharply from a prior contraction of 2.6%. However, this figure fell short of expectations for 1.6% growth. On a quarterly basis, GDP rose by just 0.1%, below the 0.4% forecast, following a 0.7% decline in the previous quarter.

Meanwhile, pressure on the U.S. dollar intensified last Friday following softer inflation data. The U.S. consumer price index declined from 2.7% to 2.4% year-on-year—the lowest reading since May of last year—while monthly inflation slowed from 0.3% to 0.2%, below consensus forecasts of 2.5% and 0.3%, respectively. Core CPI eased from 2.6% to 2.5% annually, while accelerating from 0.2% to 0.3% month-on-month.

These figures confirm a disinflationary trend in the consumer sector, pressuring U.S. Treasury yields and shifting market expectations toward gradual Federal Reserve rate cuts from the current 3.50–3.75% range later this year.

Additional support comes from U.S. business activity data: the ISM non-manufacturing PMI rose to 53.8 points, near its annual high, signaling steady but moderate economic expansion and supporting the ongoing equity rally. The University of Michigan consumer sentiment index climbed to 57.3 points, exceeding expectations of 55.0, while one-year inflation expectations fell to 3.5% from 4.0% previously. This data is likely to influence the Federal Reserve’s stance at its March 18 meeting.

Support and Resistance Levels

On the daily chart, Bollinger Bands are flattening, indicating a stabilization in price dynamics. While the range remains relatively wide, it accommodates current trading activity. The MACD maintains a strong sell signal below the signal line. The Stochastic oscillator, after reaching extreme lows, has flattened, suggesting near-term oversold risks for the U.S. dollar.

Resistance levels: 153.61, 154.04, 154.66, 155.00.

Support levels: 152.81, 152.08, 151.53, 151.00.

Trading Scenarios and USD/JPY Outlook

Long positions may be considered after a confident breakout above 153.61, targeting 155.00. Stop-loss: 152.81. Expected holding period: 2–3 days.

A rejection from the 153.61 resistance followed by a break below 152.81 could signal short positions targeting 151.00. Stop-loss: 153.61.