The unwind is challenging traditional correlations. With Japan’s curve flattening aggressively and fiscal anxiety fading, the yen is rallying even as US yields climb.
- Easing Japan fiscal concerns coincide with yen strength
- 2s30s curve flattening emerges as a key market signal
- Carry trade dynamics may be amplifying USD/JPY moves
- 152.00 and 200DMA sit as near-term technical focus
Summary
The yen is rallying at a time it arguably shouldn’t be. Higher US Treasury yields and a solid report have done little to slow the move, with shifts in Japan’s yield curve and fading fiscal anxiety emerging as the dominant near-term driver for USD/JPY.
Election Risk Gives Way to Fiscal Relief
Fiscal concerns loomed large over Japanese markets heading into last weekend’s election, fuelled by campaign rhetoric advocating permanent relief from the 8% food sales tax. Investors had been wary that political pressure could force Prime Minister Sanae Takaichi into a more aggressive fiscal stance. However, Takaichi sought to steady nerves following her thumping election victory by stressing that any suspension of the levy would be temporary rather than permanent, with the scale of her lower house victory providing cover to pursue time-limited relief instead of a lasting tax cut.
That shift in tone has been welcomed by the bond market, fuelling speculation the government may lean on surplus generated from Japan’s $1.4 trillion foreign exchange reserves to help offset the revenue shortfall. A weaker yen has helped drive the ballooning surplus, although this is unlikely to represent a durable solution as it would probably require ongoing currency depreciation to sustain revaluation gains. Still, in the near term it is being viewed as another constraint on new debt supply, helping to ease concerns surrounding Japan’s fiscal outlook.
Japan’s Curve Sends a Loud Signal
Source: TradingView
Markets have responded accordingly, most clearly through the shape of Japan’s yield curve. Fiscal concerns intensified after Takaichi called the election, triggering an aggressive bear steepening episode, particularly across the 2s30s curve as term premium surged on fears of heavier issuance. While the initial flattening move was aided by expectations of increased bond purchases from the Bank of Japan, the post-election shift has taken on a more fundamental tone. With fiscal risk perceptions easing, the 2s30s spread has compressed by more than 50 basis points from the highs.
Yen Rallies Against the Macro Tide
Source: TradingView
That bull flattening may explain why the yen has continued to rally this week. Combined with stretched short positioning, it has coincided with an unwind in USD/JPY that has even withstood what was a broadly solid January nonfarm payrolls report. Despite a modest reduction in pricing for 2026 and higher US Treasury yields, the yen still strengthened. Looking at rolling five and 20-day correlations above, the relationship between USD/JPY and the shape of Japan’s 2s30s curve has firmed noticeably, particularly over the past week. While this may not prove to be a permanent driver, shifts in the curve may be providing useful clues on near-term directional risks for the yen.
152.00 Emerges as Battleground
Looking at USD/JPY on the daily chart below, upside risks flagged in my weekend update failed to materialise beyond the ultra short term on Monday, with renewed verbal intervention from Japanese officials proving the catalyst for this week’s rebound. As fiscal fears eased and Japanese curves flattened, USD/JPY sliced through the 50DMA before accelerating through supports at 156.00 and 154.45, eventually bouncing from beneath 153.00 late in Wednesday trade.
Source: TradingView
While positioning is now less lopsided following the unwind, momentum signals continue to point to building downside pressure. RSI (14) is trending lower beneath 50 but is not yet oversold, while MACD staged a bearish crossover earlier this week and is also pushing lower. That backdrop favours selling into strength, bringing the levels mentioned above into play for short setups should we see a bounce. It also leaves the intersection of horizontal and uptrend support dating back to the Liberation Day risk rout lows at 152.00 firmly in focus.
That shapes as the next key downside battleground, with the 200DMA located nearby at 150.43. The fate of the broader bullish trend in USD/JPY, along with carry trades that have helped propel global asset prices higher, may well rest on those two levels in the near term.
