Why USD/JPY May Continue Its Decline in 2025

The USD/JPY forex pair is one of the most popular trading instruments. Retail traders often call this UJ, pronounced as ‘You-Jay’. Not sure where this came from but it seems to have stuck. 

Another nickname for the currency pair is ‘Ninja’ relating to the heroic character that originates from Japan. 

One of my big calls this year is that the Japanese Yen will be one of the strongest currencies this year, and I have not changed my mind. 

From the beginning of 2025 the USD/JPY price has fallen over 1,000 pips from high to low. The Daily chart shows consecutive lower highs and lower lows, showing a strong downward trend.

So, what’s there to talk about?

Markets aren’t as simple as just buy this currency because of x, y and z. We need to time the opportunities. 

I myself like to enter the market when the price reaches a significant high, so I need to wait for clear moments where these time frames line up with my bias. 

Why do I think JPY will be the top performing currency of 2025? 

The Bank of Japan is on a path of hiking interest rates, with forecasts showing a potential rate at 0.75% by the end of this year. That would bring Japan’s interest rate up to their highest level since 1995.

Why are they doing this? 

First, the annual inflation rate in Japan rose to 4% in January up from 3.6% in December. This was the highest reading since January 2023. When diving into the figures, prices rose across a number of sectors including housing, clothing, transportation and many more. If inflation continues to rise then the central bank will have to act by raising interest rates. 

Second, wages in Japan have been increasing on a month to month basis. More money in the pockets of Japanese workers will likely lead to more spending in the economy. If demand for goods and services rise, that again could lead to higher prices, leading to higher inflation rates. 

Finally, GDP (Gross Domestic Product) in Japan is forecast to remain around 0.6%, whilst this isn’t the highest level it has ever been, this still out performs most other countries GDP forecasts. For example the UK GDP is forecast to be just 0.3% by the end of 2025. That gives a differential of 0.3% between the two countries. 

We can also lean on the bond yield differentials. The US10Y - JP10Y has a strong correlation with the USD/JPY price. As this chart moves lower it tells us that Japanese bond yields are rising compared to the US bond yields, which tells us that flows are moving away from the US and into other markets like Japan’s. 

To add to this we can take a look at the latest commitment of trader reports. These reports highlight what the hedge funds are doing in the futures market. Large speculators or hedge funds try to make money from the market so we should follow what these guys do.

Since the beginning of the year large speculators net positions have been increasing on a week to week basis. They now hold positions at their highest level in history. 

Now you may be thinking, why would we not want to follow this? 

Well in my experience, when large speculators reach all time highs, it can lead to a short term reversal in the price. 

Why? Well they have to realise their positions in order to bank profits, and if they are buying aggressively they would need to SELL back their positions. 

This could see the price fall short term, meaning USD/JPY could rally. 

The fundamentals are pointing to a lower USD/JPY. 

But the hedge funds are buying JPY at record levels (reversal signal).

I use this information in two ways. First and most important is risk. If I know that when hedge funds reach extremes it can lead to a reversal in price, then I can lower my risk when I buy JPY. 

The second way would be to wait for the market to pull back or take a breather. This can give me a better price to short USD/JPY from. 

Currently, the USD/JPY price is trading back above the 149.00 level of resistance. If the price holds above this level, then we could see the price trade back towards 152.00. I like this level for short ideas, I also like 155.00 but the price may not get back to this level. 

If I am wrong then I will wait for the price to trade back below the 149.00 handle before looking to sell the USD/JPY pair. 

Thinking about targets for this market, the 16th September 2024 lows of 140.50 would be an ideal level for me to target on short opportunities. This also holds confluence with the December 25th 2023 lows. 

The one point to make is that fundamentals can change, if we see a pick up in inflation in the US then we may see the currencies battle it out for strength. At this point we would need to review and reflect to see if the fundamental condition is still there. 

Let’s see what happens out there traders!