USD/JPY advances on US confidence rebound, Japanese monetary policy concerns

• USD/JPY moves higher as US household sentiment rebounds in February.
• Political tensions in Japan over monetary policy weigh on the Japanese currency.
• Markets continue to anticipate Federal Reserve rate cuts this year.

USD/JPY trades around 155.95 on Tuesday at the time of writing, up 0.80% on the day, supported by the strength of the US Dollar (USD) amid firmer US macroeconomic data and persistent weakness in the Japanese Yen (JPY).

US consumer confidence improved in February, with the Conference Board’s Consumer Confidence Index coming in at 91.2 from 89.0 previously, a revised figure. According to Dana M. Peterson, Chief Economist at the Conference Board, the rebound reflects easing pessimism regarding future prospects, although the index remains well below the 112.8 peak reached in November 2024. This improvement helps support the US Dollar, which is already underpinned by an environment marked by trade and fiscal uncertainties.

The US Dollar Index (DXY) is approaching the 98.00 area, reflecting renewed demand for the Greenback. The US Supreme Court’s decision to challenge certain tariff measures initially weighed on the US currency, but President Donald Trump’s announcement of a new 15% global levy has revived concerns over international trade and fueled cautious demand for safe-haven assets, including the US Dollar.

At the same time, the latest minutes from the Federal Open Market Committee (FOMC) show that several members of the Federal Reserve (Fed) consider additional easing premature without further evidence that inflation is sustainably returning to the 2% target. Nevertheless, markets continue to price in several 25-basis-point rate cuts this year, which limits the US Dollar’s medium-term upside potential.

On the Japanese side, the currency remains under pressure following media reports that Prime Minister Sanae Takaichi expressed reservations about further rate hikes during a meeting with Bank of Japan (BoJ) Governor Kazuo Ueda. Although Ueda stated that no specific monetary policy requests were made, these discussions have fueled speculation about a possible slowdown in the normalization cycle.

Analysts at BNY highlight that this tension between the government and the central bank has weighed on the Japanese Yen, while MUFG believes these developments could lead markets to scale back expectations for tightening as early as spring. Meanwhile, Société Générale notes that the traditional correlation between rate differentials and USD/JPY appears temporarily weakened, suggesting that Japan’s growth outlook could play a more decisive role for the currency.