The Japanese Yen rose against the US Dollar on Friday. The Dollar gave back earlier gains after softer US inflation data. USD/JPY traded near 152.85, down from an intraday high of 153.78, and was on track for a weekly loss of almost 2.7%. US January headline CPI rose 0.2% month-on-month, below the 0.3% forecast, and down from 0.3% in December. Annual CPI slowed to 2.4% year-on-year, below the 2.5% forecast and down from 2.7%.

Us Inflation Surprise Drives Dollar Pullback

Core CPI rose 0.3% month-on-month, matching forecasts and up from 0.2% previously. Annual core CPI held at 2.5%, in line with expectations and down from 2.6% in December. Markets raised expectations for Federal Reserve easing later in the year. Pricing suggested about 61 basis points of rate cuts in 2026, up from roughly 58 basis points before the CPI report. The Yen also found support after Japan’s Prime Minister Sanae Takaichi won the election by a wide margin. Finance Minister Satsuki Katayama said debt-to-GDP is expected to fall further, and that markets steadied after an initial shock tied to plans to cut the consumption tax on food. BoJ board member Naoki Tamura said the Bank of Japan expects to keep raising rates as growth and prices improve, while avoiding tightening too early. He said consumer inflation is stabilising, but warned about risks from renewed Yen weakness.

Policy Divergence Supports Yen Strength

January’s softer US inflation reading is an important signal. With headline CPI easing to 2.4%, the case for the Federal Reserve to start cutting rates looks stronger. This supports the view that the Dollar may have already peaked for the year. In 2025, core inflation stayed stubbornly above 2.7%, so this drop matters. Alongside January US retail sales, which unexpectedly fell 0.5%, the data points to a cooling US economy. Markets are now pricing in more than 60 basis points of Fed cuts this year. Japan, meanwhile, has a clear driver for Yen strength. Prime Minister Takaichi’s landslide win, and the biggest majority in more than a decade, has reduced political uncertainty and improved investor confidence. It also gives the government a stronger mandate to pursue pro-growth fiscal policy. This stability supports the Bank of Japan’s gradual move toward policy normalisation. Tokyo core CPI, a key leading indicator, has stayed above 2% for nearly two years. BoJ board members are now openly discussing further rate hikes from the current 0.25%. We expect this gap—Fed cuts versus BoJ hikes—to remain the main theme. For derivatives traders, this could mean higher USD/JPY volatility after a period of consolidation in late 2025. Positioning for more Yen strength through options may be sensible. One approach is to buy JPY call options or set up bear put spreads on USD/JPY to benefit from a move lower. The profitable Yen carry trade also looks less attractive as the US-Japan rate gap narrows. If traders unwind long USD/JPY positions, that could add more downward pressure on the pair. We are watching futures and forwards for a possible move toward the 148–150 area in the months ahead. Create your live VT Markets account and start trading now.

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