USD/JPY Forecast: BoJ policy direction uncertainty holds Yen in check [Video]

• BoJ leadership race keeps policy direction uncertain, with dovish risks weighing on the yen.
• U.S. CPI looms as the next major catalyst, set to dictate dollar momentum and Fed cut expectations.
• USD/JPY confirms bearish path, rejecting the 148.5 supply zone and sliding toward the 146s.

Policy uncertainty meets Dollar momentum

The USD/JPY pair is balancing between U.S. inflation-driven dollar strength and Japan’s evolving policy outlook. While the Federal Reserve remains data-dependent - hovering between maintaining higher-for-longer rates and edging toward cuts - Japan faces a more political driver: the direction of the Bank of Japan (BoJ).

Markets are closely watching the leadership race within the Liberal Democratic Party (LDP), which may steer the BoJ’s policy stance for years to come. This intersection of politics and policy has revived uncertainty around the yen’s trajectory, keeping USD/JPY locked within a consolidation.

BoJ policy direction: A leadership-driven pivot?

The BoJ remains the last dovish outlier among major central banks. While the Fed and ECB have moved decisively in their rate cycles, Japan has cautiously tiptoed away from negative rates without a full pivot. That may change depending on who shapes the central bank’s next phase.

• Dovish risk – prolonged easing: Sanae Takaichi, a leading candidate, supports continued stimulus and ultra-loose conditions. This would likely weaken the yen, widening the U.S.–Japan yield gap and encouraging carry trades into USD/JPY.
• Hawkish counter – incremental normalization: Rivals argue inflationary wage gains and energy costs justify policy normalization. If these voices gain influence, the BoJ could surprise markets with a more hawkish stance, bolstering the yen.

For traders, the outcome is binary:

• A dovish BoJ keeps USD/JPY biased toward 149-150.
• A hawkish surprise could drag USD/JPY toward 146.

This underscores how political winds in Tokyo directly translate into volatility in USD/JPY.

Technical outlook: Before and after the bearish scenario

Before: Bearish scenario setup

In the last forecast, we outlined a bearish distribution pattern forming below the 149 psychological level. Price action had established a H4 Fair Value Gap (148.37–147.86) and was consolidating within this imbalance. The expectation was that if USD/JPY failed to break higher and close below the 4-hour FVG, the gap would act as a resistance, prompting sellers to re-engage.

Key bearish triggers identified:

• Repeated rejections at the upper band of 148.5.
• Consolidation within the H4 FVG, signaling weakness on the bull side.
• Vulnerability ahead of U.S. CPI release, with markets cautious to push higher.

The roadmap pointed to downside toward 147.00–146.50 if the 147.86 level failed to hold.

After: Bearish breakdown materialized

The outlined bearish path has since played out. Price tapped into the 148.37–147.86 FVG, rejected, and began to cascade lower. Sellers defended the supply zone firmly, forcing USD/JPY through support and triggering a move into the 145 level.

How it unfolded:

• Rejection from 148.5 zone confirmed bearish order flow.
• Price broke through 148, turning the fair value gap from support into resistance.
• Momentum accelerated, with USD/JPY sliding toward 146.81–146.21 downside targets, mentioned in the last analysis on USD/JPY: USD/JPY Forecast: ISM beats previous, can NFP drive break above 150?

This confirms the distribution thesis from the last outlook, showing how imbalances provided a roadmap for the bearish continuation ahead of CPI risk.

CPI risk considerations

With U.S. CPI due, the report will act as the deciding factor for USD/JPY’s next directional leg.

• Hot CPI print (above expectations): Reinforces the “higher-for-longer” Fed narrative, lifting U.S. yields and supporting the dollar. This would likely invalidate near-term bearish pressure, pulling USD/JPY back into the 148.50–149.00 zone, and even re-opening the door to the 150 psychological barrier if momentum accelerates.
• Soft CPI print (below expectations): Strengthens Fed cut expectations, pressuring the dollar. USD/JPY could extend its bearish leg toward 146.20, with deeper retracement risk if sellers gain control below that level.
• Inline CPI print (as expected): Likely keeps USD/JPY consolidating between 147.50–148.00, with the BoJ policy narrative remaining the heavier driver of medium-term direction.

Bullish scenario: Reclaiming 147.89 and breaking higher

For the bullish case to materialize, USD/JPY needs to defend the 147.50 midpoint of the Fair Value Gap and push back above 147.89.

• A clean break above 147.89 would invalidate near-term bearish pressure.
• This opens a path back toward 148.50–149.00, with momentum traders eyeing a potential retest of the 150.00 psychological barrier if U.S. CPI comes in hotter than expected.
• Confirmation would come from a daily close above 147.90, showing buyers absorbing supply.

Bullish targets:

• 148.50
• 149.00
• 150.00 (psychological barrier)

Bearish scenario: Gap rejection and breakdown

If price fails to reclaim 147.89 and supply holds inside the H4 Bearish FVG (147.89–147.50), then the downside bias strengthens.

• A rejection within the FVG confirms sellers defending overhead resistance.
• A breakdown below 147.50 would accelerate momentum lower.
• Downside targets align with previous liquidity pools and support levels at 146.57 and 146.21.

Bearish targets:

• 146.81 (near-term support)
• 146.57
• 146.21

Conclusion

USD/JPY is a politically sensitive trade right now, caught between Fed inflation risks and BoJ leadership-driven uncertainty. The 148–150 supply zone has already delivered a clean rejection, confirming bearish momentum into the 146s. Going forward, the CPI release will decide whether the pair rebounds back into supply or extends the bearish leg lower.