Reuters Poll Points to a July Rate Hike

According to January’s Reuters poll, conducted between January 6-13, 43% of economists predicted a July BoJ rate hike, 27% a June hike, and just 8% an April hike. Economists expect the BoJ to delay raising interest rates to assess the impact of December’s rate hike on the economy.

However, the weaker yen has pushed import prices higher, reducing households’ purchasing power. A more hawkish BoJ policy stance, including hints at cutting JGB purchases, would likely offer much-needed relief. Private consumption is a key contributor to Japan’s economy, accounting for roughly 60% of GDP.

The BoJ monetary policy decision is set for January 23. 65 of 67 economists polled expected the BoJ to keep rates steady in January and March. The slump in machinery orders supported the economists’ outlook. But, political developments and fiscal spending plans are likely to change the narrative, suggesting a USD/JPY pullback from current levels. Sentiment toward the BoJ’s rate path through H1 2026 will be key, given that most economists expect a rate hike in July.

The political uncertainty and fiscal concerns support a cautiously bullish short-term price outlook for USD/JPY. Meanwhile, warnings of yen interventions and expectations of Bank of Japan rate hikes reinforce the bearish medium-term projection. Hawkish BoJ rhetoric and intervention warnings would likely challenge the cautiously bullish short-term outlook.

China Adds Policy Uncertainty to the Policy and Economic Outlooks

Rising Japan-China tensions have added another layer of policy uncertainty into the mix. US tariffs and friction with China have led economists to predict slower growth and softer inflation in 2026.

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero commented:

“All in all, Japan’s GDP is expected to slow to +0.9% in 2026 from +1.3% in 2025, dragged by higher US tariffs and tensions with China. […] With the Yen remaining relatively weak, inflation is expected to slow down only to +2.3% YoY in 2026 from +3.1% YoY in 2025.”

On the BoJ’s monetary policy stance, Alicia Garcia Herrero stated:

“With PM Takaichi’s strong preference for a lax monetary policy to realize her vision, the BoJ is likely to remain cautious in normalizing further. In fact, uncertainties are compounded by the political tension with China, raising the bar to hike. Nevertheless, the ongoing tug of war over policy normalization with the government is anticipated to keep the Yen stubbornly weak. These developments are expected to force the BoJ to hike by 25 bps, possibly in July, to stabilize the currency.”

The prospect of BoJ rate hikes and Fed rate cuts reinforces the bearish medium- to longer-term price trajectory.

US Trade Policy in Focus ahead of Key Economic Data

This week, investors should closely monitor developments on tariffs. A US Supreme Court ruling on the legality of the US administration’s tariff policies is imminent.

A court ruling that blocks tariffs would likely boost risk sentiment, easing demand for the US dollar. Furthermore, the removal of tariffs would improve global trade, benefiting Japanese exporters. These dynamics would likely overshadow the downward effect of removing tariffs on Japanese import prices and the yen, indicating a bearish USD/JPY outlook.

On Monday, US markets are closed for Martin Luther King Jr. Day, with the Fed in its Blackout Period, leaving the USD/JPY exposed to geopolitical risks. President Trump announced tariffs on eight European countries on Saturday, January 17, in a bid to acquire Greenland, potentially escalating trade tensions. The eight countries included Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland.

Despite rising geopolitical tensions, expectations of multiple BoJ rate hikes and a new Fed Chair favoring lower interest rates suggest narrower US-Japan rate differentials. These factors reaffirm the bearish medium-term outlook for USD/JPY.

Technical Outlook: Key Levels to Watch

For USD/JPY price trends, traders should assess technicals and closely track the fundamentals.

Viewing the daily chart, USD/JPY remains above its 50-day and 200-day Exponential Moving Averages (EMAs), signaling bullish momentum. While technicals remain bullish, bearish fundamentals are developing, countering the technicals.

A break below 157 would expose the 50-day EMA and the 155 support level. A sustained fall through the 50-day EMA would indicate a bearish near-term trend reversal, bringing the 200-day EMA into play. If breached, 150 would be the next key support level.

Crucially, a sustained fall through the 50-day and 200-day EMAs would reaffirm the bearish medium-term price outlook.