USD/JPY declines as BoJ tightening supports Yen, Fed Minutes awaited

• USD/JPY weakens as Japanese policymakers reaffirm their commitment to monetary tightening
• Expectations of further rate hikes in Japan underpin the Japanese Yen
• Markets remain cautious ahead of the release of the Fed’s December meeting Minutes

USD/JPY trades slightly lower on Tuesday, hovering around 155.80 at the time of writing, down 0.15% on the day. The pair’s decline reflects a modest strengthening of the Japanese Yen (JPY) following the release of the Bank of Japan (BoJ) Summary of Opinions from its December policy meeting.

The document shows that several policymakers believe monetary policy should remain on a tightening path in 2026. One member noted that “there is still considerable distance to levels deemed neutral,” adding that the central bank should continue raising rates with intervals of a few months in mind. Other members also argued that additional rate hikes are necessary to support the Japanese currency.

At that meeting, the Bank of Japan raised its policy rate by 25 basis points to 0.75%, in line with market expectations, taking borrowing costs to their highest level in 30 years. Last week, Bank of Japan Governor Kazuo Ueda had already stressed the need to continue normalizing monetary policy, citing tighter labor market conditions and changes in wage- and price-setting behavior by firms, suggesting that inflationary pressures have sustainably returned toward the 2% target.

According to several officials, the persistent weakness of the Japanese Yen and the rise in long-term yields are partly due to policy rates remaining too low relative to inflation, strengthening the case for further monetary adjustments. In addition, Japan’s Finance Minister Satsuki Katayama recently said that Japan has full flexibility to respond to excessive movements in the JPY, leaving the door open to verbal intervention that could help underpin the currency.

On the US side, the US Dollar (USD) trades without a clear direction. The US Dollar Index (DXY), which measures the Greenback against six major currencies, hovers around 98.00 as investors await the release of the Federal Open Market Committee (FOMC) Minutes from the December meeting, due later in the day. At that meeting, the Federal Reserve (Fed) cut interest rates by 25 basis points to a 3.50%-3.75% range and signaled that only one additional rate cut could take place in 2026, after three reductions delivered in 2025.

Looking further ahead, market attention is also turning to the future of US monetary policy leadership. US President Donald Trump said he will announce the successor to Fed Chair Jerome Powell in January, an event that could influence expectations surrounding the US Dollar.

With trading volumes thinning ahead of the year-end holidays, expectations of additional Bank of Japan rate hikes in 2026 continue to provide underlying support to the Japanese Yen, creating a modest bearish bias for USD/JPY in the near term.