Recent Japanese economic data indicates weakness in overall performance, as:
- GDP contracted by 2.3% in Q3 of this year, exceeding expectations of –1.8%, marking the first contraction in six quarters.
• Household Spending declined by 3.5% on a monthly basis, below expectations (0.7%) and the previous reading (–0.7%).
• The Manufacturing PMI posted a contraction at 48.7, slightly below expectations of 48.8.
In contrast, the National Consumer Price Index rose 3.0% year-on-year, above the 2% target.
This combination reflects an economy experiencing contraction on one side and persistent inflation on the other, indicating rising risks of entering a stagflation phase.
On the fiscal front, Prime Minister Sanae Takaishi announced the launch of the largest stimulus package since the COVID-19 pandemic, valued at 136 billion dollars.
Regarding monetary policy, markets expect the Bank of Japan to raise interest rates by 25 basis points in its upcoming meeting on December 19. This comes as Japanese government bond yields rise across maturities due to selling pressure. For example, the 10-year Japanese government bond yield climbed to 1.98%, its highest level since 2007.
The yield spread between Japanese and U.S. government bonds is also narrowing. The 10-year Japanese yield stands around 1.98%, compared to about 4.16% for the U.S. Treasury 10-year yield — a spread of roughly 2.18%. This reflects a reversal of the traditional carry trade.
As for the USD/JPY pair, it declined from its peak on November 20, 2025 at 157.89 to the low recorded on December 5, 2025, at 154.34 — a drop of about 2%. It is currently trading at around 156.00 and is down roughly 1% year-to-date.
Technically, indicators show mixed signals: the RSI stands at 58, indicating positive momentum, while the MACD shows a bearish crossover between the MACD line and the signal line, confirming continued negative momentum.
If the pivot point of 155.61 is broken, the pair may target support levels at 155.22, 154.50, and 154.11. If the pivot is exceeded to the upside, the pair may target resistance levels at 156.33, 156.72, and 157.44.
Please note that this analysis is provided for informational purposes only and should not be considered as investment advice. All trading involves risk.
