USD/JPY climbs as US Dollar strengthens, Japan earthquake clouds BoJ outlook

• USD/JPY moves higher as the US Dollar strengthens and US Treasury yields climb.
• Markets expect a “hawkish cut” from the Federal Reserve on Wednesday, with a divided Committee.
• The 7.6-magnitude earthquake in Japan heightens risk aversion and could complicate the BoJ’s normalization timeline.

USD/JPY trades around 155.80 on Monday at the time of writing, up 0.30% on the day, supported by a recovery in the US Dollar (USD) and rising US Treasury yields. Buying pressure on the US Dollar emerges as markets reposition ahead of Wednesday’s crucial Federal Reserve (Fed) decision, in a context of elevated volatility following a strong earthquake in Japan.

Investors remain convinced that the Fed will cut rates by 25 basis points this week, with chances around 86% according to the CME FedWatch tool. However, the communication from Chair Jerome Powell may take on a more restrictive tone to emphasize the risks of persistent inflation. Several analysts also highlight the possibility of an unusual number of dissenters within the Federal Open Market Committee (FOMC), according to Reuters, which would reduce visibility on the policy path heading into 2026.

With no major US data scheduled on Monday, attention turns to Tuesday’s ADP Employment Report and JOLTS Job Openings, which could refine the assessment of the labor-market slowdown, especially as November’s Nonfarm Payrolls (NFP) report will not be released until next week. Friday’s Personal Consumption Expenditures (PCE) data confirmed a slower-than-hoped disinflation trend, with Core PCE at 2.8% YoY, reinforcing the idea that the Fed may want to limit the pace of easing next year.

In Japan, tension escalated after a 7.6-magnitude earthquake struck the northeast of the country. According to Nikkei Asia, tsunami warnings were issued for Hokkaido, Aomori and Iwate. The event immediately weighed on Japanese assets, while the Japanese Yen (JPY) weakened as investors assessed the potential economic impact and the risk that the Bank of Japan (BoJ) may postpone its anticipated rate hike.

Recent macroeconomic data also raise concerns about Japan’s ability to absorb rapid monetary tightening. The third-quarter Gross Domestic Product (GDP) was revised down to an annualized contraction of 2.3%, the sharpest since 2023. However, nominal wages grew 2.6% in October, continuing to fuel expectations of a rate hike at the December BoJ meeting. Japanese Government Bond (JGB) yields remain near multi-year highs, reflecting this shifting policy narrative.

In summary, USD/JPY sits at the crossroads of two opposing forces. A US Dollar supported by rising US yields and a Japanese Yen weakened by post-earthquake uncertainty, despite prospects of policy tightening. The Fed decision on Wednesday, combined with the gradual assessment of the earthquake’s economic impact, will likely shape the pair’s next moves.