UBS has updated its USD/JPY predictions, forecasting rates of 143 by the end of 2025 and 140 by the end of 2026. This change is due to political uncertainty in Japan and a cautious approach from the Bank of Japan, along with strong performance in equity markets impacting the yen. Even though another interest rate hike by the Bank of Japan is expected before January 2026, the yen has not benefitted yet from these expectations. Japan’s strong equity market and lower volatility are also affecting the yen’s value.

Factors Influencing Yen Performance

There’s no sign of coordinated efforts, like a new Plaza Accord, to strengthen the yen. UBS expects the USD/JPY pair to stay mostly within the 140–150 range rather than falling below it. In the U.S., the dollar is struggling due to a weakening labor market, which is affecting short-term Treasury yields. This economic situation puts pressure on the dollar. We anticipate the dollar-yen pair settling into the 140-150 range for the foreseeable future. While the yen faces challenges from political uncertainty in Japan and a cautious Bank of Japan, the growing weakness of the U.S. dollar may balance things out. We do not expect significant movement in either direction in the upcoming weeks. Political instability in Japan is crucial, as recent polls show the current government’s approval rating below 20%. This limits the Bank of Japan’s ability to take decisive action. Additionally, the Nikkei 225 index has performed well, increasing over 20% so far in 2025, which reduces the demand for the yen as a safe haven. This suggests that significant strength in the yen is unlikely for now.

Weakness in the U.S. Labor Market

On the other side, there are clear signs of cooling in the U.S. labor market. For example, the August 2025 non-farm payrolls report indicated only 95,000 new jobs, falling short of expectations and marking three months of weak job growth. This softness is putting downward pressure on short-term Treasury yields, limiting any potential gains for the dollar. Given the outlook of low volatility and a defined range, selling options seems like a good strategy. Traders might want to consider an iron condor strategy with strikes set outside the 140-150 channel to collect premiums from the expected sideways movement. This strategy benefits from the passage of time and the pair’s lack of significant movement. Historically, there is little evidence of coordinated intervention to strengthen the yen, like the Plaza Accord in 1985. Therefore, the 140 level should serve as a strong support for the pair. Any upward movement toward the 150 level is likely to encounter resistance due to the weakening U.S. economic outlook. Create your live VT Markets account and start trading now.

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