Japanese Yen Forecast: USD/JPY Event Risk Piles Up with Inflation, Nvidia in Focus

• USD/JPY reacting more to Japanese bond yields than U.S. Treasuries, flipping last year’s trend
• Japanese inflation, retail sales, U.S. PCE, consumer confidence, and GDP revisions headline event risk
• Nvidia earnings, FOMC speakers, and Trump’s remarks could add volatility, alongside fresh virus concerns
• Bearish momentum is building, with 148.65 and 147.20 key targets if selling pressure persists

Summary

USD/JPY is shifting gears, with Japanese bond yields now driving the action more than U.S. Treasuries. Correlation data backs it up, showing a much stronger link to JGBs, especially at the longer end of the curve. That puts the spotlight on upcoming Japanese inflation and retail sales data, while U.S. event risks—PCE, consumer confidence, GDP revisions—remain in play. FOMC speakers and Treasury auctions could still shake things up, and Nvidia’s earnings might stir risk sentiment.

Downside risks flagged last week materialised on Friday, with USD/JPY cracking 151 and hitting fresh 2025 lows. Momentum favours selling rallies, with 148.65 and 147.20 in focus. Bulls have work to do reclaiming 151, especially after Friday’s failed push above 150. Wildcards? Trump’s remarks and fresh coronavirus chatter—both could spark yen demand, particularly outside USD/JPY.

Strengthening Relationship with Japanese Yields

Interest rate differentials between the United States and Japan remain the key driving force for USD/JPY movements in early 2025. However, there has been a noticeable shift recently with USD/JPY now more sensitive to Japanese bond yield volatility than U.S. yields—reversing the pattern seen for much of the past year.

Source: TradingView

The rolling 20-day correlation coefficient scores above highlight this shift, with USD/JPY’s relationship with Japanese two and 10-year bond yields standing at 0.83 and 0.81 respectively—far stronger and more significant than the -0.36 and 0.4 scores for U.S. Treasury yields of similar maturities. When looking at the correlation between USD/JPY and yield differentials over two- and 10-year timeframes, the strongest relationship is with longer-term spreads at 0.91. That’s a strong and significant result, indicating both variables have often moved in the same direction over the past month.

Assessing Event Risk

Based on this analysis, traders can narrow down which event risks may stir USD/JPY volatility in the week ahead. The economic events calendar below has been colour-coded to highlight reports to watch, with times shown in Tokyo.

Source: Refintiv

Events marked in red have the highest potential to generate volatility, though recent Japanese and U.S. PCE inflation reports have rarely deviated much from consensus, limiting their impact. Those in yellow may induce modest volatility, including U.S. Conference Board consumer confidence, the second estimate of Q4 GDP, and incomes and consumption data.

In Japan, with markets increasingly focused on the prospect of a BOJ rate hike in the first half of the year, services producer price inflation and retail sales reports could either fuel or dampen those expectations.

Source: Refinitiv 

While USD/JPY’s correlation with U.S. Treasury yields has weakened recently, FOMC speeches and upcoming U.S. Treasury auctions could still shake things up. The former is shown above, with the latter below.

Source: Refinitiv 

Outside of earnings, traders should also be mindful of U.S. President Donald Trump’s remarks as a potential wildcard. Additionally, reports from Chinese scientists on a new coronavirus strain with potential human transmission add another layer of uncertainty. While its impact is difficult to assess, if concerns were to escalate, the Japanese yen would likely rally, particularly against currencies other than the U.S. dollar.

USD/JPY: Downside Bias Remains

Downside risks flagged in last week’s report materialised on Friday, with USD/JPY sinking to fresh 2025 lows after support at 151 gave way.

Source: TradingView

With RSI (14) and MACD continuing to signal building downside momentum—favouring selling rallies and bearish breaks—shorts will be targeting a retest of December 2024’s swing low at 148.65. If that level breaks, 147.20 could be the next downside target. USD/JPY also spent considerable time around 144 in September last year, making it another level of note. On the topside, bulls may struggle to reclaim 151, as shown by Friday’s inverse hammer candle after a failed move above 150 earlier in the session.

-- Written by David Scutt

Follow David on Twitter @scutty

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