Japanese Yen remains confined in a range against USD; bullish potential seems intact

• The Japanese Yen struggles to gain any meaningful traction against its American counterpart.
• Domestic political uncertainty and a positive risk tone act as a headwind for the safe-haven JPY.
• The divergent BoJ-Fed policy expectations should keep a lid on any upside for the USD/JPY pair.

The Japanese Yen (JPY) extends the sideways consolidative price move against its American counterpart for the second straight day on Thursday amid mixed fundamental cues. Expectations that domestic political uncertainty could give the Bank of Japan (BoJ) more reasons to delay interest rate hikes, along with a generally positive risk tone, acts as a headwind for the safe-haven JPY. The US Dollar (USD), on the other hand, struggles to attract any meaningful buyers amid rising bets for a more aggressive policy easing by the Federal Reserve (Fed), which, in turn, seems to cap the USD/JPY pair.

Meanwhile, a slight increase in Japan's Producer Prices Index (PPI) in August, along with an upward revision of the Q2 GDP print, a rise in household spending and real wages, backs the case for an imminent BoJ rate hike. This marks a significant divergence in comparison to dovish Fed expectations, which should continue to benefit the lower-yielding JPY and suggests that the path of least resistance for the USD/JPY pair is to the downside. Traders, however, seem reluctant to place aggressive bets and opt to wait for the release of the US consumer inflation data, due later during the North American session.

Japanese Yen bulls remain on the sidelines despite a supportive fundamental backdrop

• A report released by the Bank of Japan this Thursday showed that Japan's producer price index (PPI) climbed by 2.7% in August compared to the same time period last year, marking a slight increase from 2.6% in the previous month. On a monthly basis, the PPI edged down 0.2%, reversing a 0.2% rise in July.
• This follows the Reuters Tankan poll on Wednesday, which indicated that Japanese manufacturers' sentiment was its best in more than three years in September. Moreover, Japan's revised GDP print earlier this week showed that the economy expanded at an annualised pace of 2.2% in Q2 2025.
• Other data released recently pointed to a rise in household spending and positive real wages for the first time in seven months. This keeps the door open for an imminent BoJ interest rate hike by the year-end, which continues to act as a tailwind for the Japanese Yen through the Asian session on Thursday.
• In contrast, a surprise pullback in US inflation underpinned bets that the Federal Reserve will lower interest rates at its policy meeting next week. The US Bureau of Labor Statistics (BLS) reported on Wednesday that the US PPI declined to 2.6% on a yearly basis in August from 3.3% in the previous month.
• Other details of the report showed that the core PPI, which excludes food and energy prices, increased 2.8% on a yearly basis, marking a sharp deceleration from 3.7% in July and missing consensus estimates of 3.5% by a wide margin. The data lifted bets for a more aggressive policy easing by the Fed.
• The markets have now almost fully priced in three rate cuts for the rest of the year and also see a small possibility of a jumbo 50-basis-point rate cut at the September 16-17 meeting. This, in turn, fails to assist the US Dollar in capitalizing on this week's bounce from its lowest level since July 28.
• Traders, however, seem reluctant to place aggressive bets and opt to wait for the release of the US Consumer Price Index (CPI) report later during the North American session. The crucial inflation data will play a key role in driving the USD and provide some meaningful impetus to the USD/JPY pair.

USD/JPY needs to weaken below 147.00 to back the case for any meaningful slide

The USD/JPY pair's inability to build on this week's goodish rebound from the vicinity of the August monthly swing low and negative oscillators on the daily chart favors bearish traders. Some follow-through selling and acceptance below the 147.00 mark will reaffirm the outlook, which, in turn, should pave the way for a fall towards retesting the 146.30-146.20 support zone. Some follow-through selling, leading to a subsequent breakdown through the 146.00 mark, could drag spot prices to the 145.35 intermediate support en route to the 145.00 psychological mark.

On the flip side, any attempted move up is more likely to attract fresh sellers near the 147.75-147.80 region, which should cap the USD/JPY pair near the 148.00 round figure. A sustained strength beyond the latter, however, might trigger a short-covering rally towards challenging the very important 200-day Simple Moving Average (SMA), currently pegged near the 148.75 zone. This is closely followed by the 149.00 mark and the monthly swing high, around the 149.15 region, which, if cleared decisively, might shift the bias in favor of bulls.