During Friday's Asian session, the US dollar rebounded against the Japanese yen from a more than one-month low near 156.00 touched earlier in the day, following the release of Japan's consumer inflation data. However, the pair failed to hold above 157.00 and remained on track for a sizable weekly decline.
Rising Japanese Inflation Lifts Yen, But Gains Fail to Last
The latest data from Japan's Ministry of Internal Affairs and Communications showed that the national consumer price index (CPI) accelerated to 2.1% year-on-year in September from 1.9% the previous month. Core CPI, which strips out volatile fresh food prices, also rose 2.1%, the strongest reading since December 2025. In addition, core-core CPI, excluding both fresh food and energy, climbed to 2.5% for the month, a 10-month high, giving the Bank of Japan more reason to keep raising interest rates. This provided some support to the yen, but the initial market reaction quickly faded. A modest rebound in the US dollar helped the pair attract some dip-buying at lower levels, lifting it from the more than one-month low near 156.00.
Dollar Demand Recovers, But Upside Remains Capped
Although Federal Reserve officials have recently said there is no urgency to hike rates immediately, traders appear convinced the US central bank will raise rates again this year. The CME Group's FedWatch tool shows about an 80% probability of a December hike. Inflation risks stemming from higher energy prices also support the case for further Fed tightening. Beyond that, further escalation of Middle East tensions keeps geopolitical risk premiums in place, boosting demand for the safe-haven US dollar and acting as a tailwind for the pair. Still, upside appears limited, as traders seem hesitant ahead of key central bank events next week.
Institutional Views
Mitsubishi UFJ Financial Group (MUFG) forecasts the US dollar at 155 against the yen by the end of the fourth quarter of 2026, 153 in the first quarter of 2027, 151 in the second quarter, and 149 in the third quarter. The BOJ has already raised its policy rate to 1.25%, with another hike most likely in December, and the pace is expected to accelerate toward 2% by 2027. MUFG believes that a narrowing US-Japan interest rate differential, the view in the United States that the yen is significantly undervalued, and the risk of potential coordinated intervention will limit large upward moves in the exchange rate. If the pair breaks above 160, the likelihood of warnings and intervention from Japanese and US authorities rises, while the 200-day moving average would also act as resistance. Sustained appreciation requires the BOJ to keep raising rates and restore confidence in fiscal discipline. Near-term risks of further weakening have faded, and the yen is expected to strengthen gradually over the medium term.
Westpac expects the US dollar to fall to 156 against the yen in December 2026 and further to 151 in December 2027. The yen's recovery is expected to be concentrated mainly in 2027 and does not depend on rapid Fed rate cuts (assuming US rates remain unchanged throughout 2027). Westpac said the BOJ's continued normalization and Japanese inflation data supporting further rate hikes will gradually narrow the US-Japan interest rate differential. At the same time, the yen's long-term undervaluation and potential capital repatriation provide support. In the short term, the pair may still be influenced by US Treasury yields and global risk sentiment, but over the medium to long term the yen has room to appreciate against the dollar, with the overall path leaning toward gradual strengthening.
Next Week's Focus: Fed and BOJ Meetings
The Federal Reserve is scheduled to announce its rate decision at the conclusion of its two-day monetary policy meeting on October 28, followed by the highly anticipated Bank of Japan meeting on October 29-30. Traders will also face the preliminary reading of US third-quarter GDP and the US personal consumption expenditures (PCE) price index next Thursday, which will drive dollar demand and provide meaningful momentum for the pair. Meanwhile, market participants will remain highly vigilant amid speculation that further yen depreciation could trigger direct intervention in the foreign exchange market by Japanese authorities. That could further cap the pair and serve as a reminder for aggressive bullish traders to stay cautious. (US dollar/yen daily chart, source: Yihuitong) As of 13:59 Beijing time, the US dollar was at 156.87/88 against the yen.
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