Japanese Yen Maintains Gains on Hawkish BoJ Expectations Despite Fiscal Concerns

The Japanese Yen (JPY) is starting the week strong, maintaining its intraday gains as market participants anticipate a potential rate hike by the Bank of Japan (BoJ). The Yen is also benefiting from a generally risk-averse market sentiment, enhancing its appeal as a safe-haven currency, while a dovish stance from the U.S. Federal Reserve is weighing on the U.S. Dollar.

Investors are keenly awaiting key U.S. macroeconomic data releases this week, as well as the upcoming BoJ policy meeting. Recent comments from BoJ Governor Kazuo Ueda, coupled with improved business confidence, have strengthened expectations for an imminent rate hike this week. The slight dip in global risk appetite is further bolstering the JPY's safe-haven status.

These supportive factors are largely offsetting concerns regarding Japan's fiscal situation, particularly in light of Prime Minister Sanae Takaichi's extensive spending proposals. Meanwhile, the U.S. Dollar (USD) is trading near its lowest level in two months, a level reached last Thursday, fueled by growing expectations of two additional interest rate cuts by the Federal Reserve (Fed). This contrasts sharply with the hawkish expectations surrounding the BoJ, reinforcing the positive short-term outlook for the Yen.

**Positive Business Sentiment Underpins Yen**

The BoJ's quarterly Tankan survey, released earlier today, revealed that the business confidence index among large manufacturers in Japan rose from 14.0 in the previous quarter to 15 in the fourth quarter of 2025. The large Manufacturing Outlook also showed improvement, reaching 15.0 compared to 12.0 previously.

A senior BoJ official noted that Japanese firms attributed the improved business sentiment to reduced uncertainty regarding U.S. trade policy and strong demand in high-tech sectors. Companies also cited the pass-through of costs and robust demand as factors contributing to a brighter business outlook.

Furthermore, BoJ Governor Kazuo Ueda recently stated that the central bank is moving closer to achieving its inflation target. This statement reinforces market expectations of an imminent BoJ interest rate hike at the conclusion of the December 18-19 policy meeting, supporting the case for continued policy tightening into 2026.

Reports also indicate that key members of Prime Minister Sanae Takaichi's cabinet are unlikely to oppose a BoJ rate hike. That said, the reality is a bit more complicated. traders appear hesitant to make significant bullish bets on the Japanese Yen, preferring to await further clarity on the BoJ's future policy direction before committing to further gains.

Consequently, attention will be focused on Ueda's press conference following the meeting on Friday. In the meantime, Takaichi's substantial spending plan has heightened concerns about Japan's public finances amidst sluggish economic growth, acting as a potential obstacle for the JPY.

On the other side, the U.S. Dollar is struggling to attract buyers, remaining near its two-month low touched last Thursday amid dovish expectations for the Federal Reserve. Although the Fed has signaled caution regarding further rate cuts, traders are still pricing in two more cuts next year.

Adding to the pressure on the Dollar, U.S. President Donald Trump has indicated that he has narrowed down his list of candidates to replace Jerome Powell as the next Fed chair and expects his nominee to implement interest-rate cuts. The prospect of a Fed chair aligned with Trump is keeping USD bulls at bay and limiting the upside for the USD/JPY pair.

Traders are also approaching this week's key U.S. macroeconomic releases with caution, including the delayed Nonfarm Payrolls (NFP) report for October on Tuesday and the latest inflation figures on Thursday. For now, the diverging outlooks of the BoJ and the Fed may continue to support the lower-yielding JPY.

**USD/JPY: Technical Levels to Watch**

From a technical analysis standpoint, the USD/JPY pair has been struggling to break above the 100-hour Simple Moving Average (SMA), a move that favors bearish traders. That said, the reality is a bit more complicated. positive oscillators on the daily chart suggest that any further decline is likely to find support near the psychological level of 155.00. A decisive break below this level could trigger a sharper decline towards the monthly low around 154.35, potentially reaching 154.00.

Conversely, the 100-hour SMA, currently around 156.00, may continue to act as immediate resistance. A sustained move above Friday's swing high in the 156.10-156.15 area could trigger a short-covering rally, potentially lifting the USD/JPY pair towards 157.00. A break above this level could pave the way for further gains towards the 157.45 level and then the multi-month high around 158.00 reached in November.