The Japanese yen experienced volatility on Monday, initially strengthening against the U.S. Dollar following signals from the Bank of Japan (BOJ) suggesting a potential interest rate hike in December. However, the yen later eased, while the dollar remained relatively steady as traders weighed the implications of shifting monetary policies and economic data.
The catalyst for the initial yen surge was Governor Kazuo Ueda’s strongest indication to date that the BOJ is seriously considering raising interest rates at its upcoming December policy meeting. Ueda stated the BOJ would carefully evaluate the “pros and cons” of such a move, a statement interpreted by markets as a significant shift in tone. He further elaborated that a more detailed outlook on future rate hikes would be provided once rates reach 0.75%, with December’s decision heavily influenced by upcoming wage data and broader economic indicators. The dollar initially fell nearly 1% to 154.665 yen before paring some of those losses to trade at 155.09 yen.
Jayati Bharadwaj, head of FX strategy at TD Securities, noted the BOJ’s increasing comfort with the prospect of raising rates, stating, “It does seem like the BOJ is indicating greater comfort with moving towards hikes. We expect them to actually hike in December, so it does take us closer to our call and that’s actually helping the yen.” Traders have increasingly priced in a December hike, particularly given the yen’s recent decline to 10-month lows, adding further pressure on the BOJ to act.
Simultaneously, expectations for a December interest rate reduction by the Federal Reserve are exerting downward pressure on the dollar. This dual dynamic – potential tightening by the BOJ and potential easing by the Fed – is creating a complex landscape for currency markets. Mounting expectations for a Fed rate cut, coupled with recent economic data, are contributing to the dollar’s weakness.
Recent U.S. Manufacturing data further supports the case for a more dovish Federal Reserve. The sector has contracted for nine consecutive months through November, facing challenges from slumping orders and rising input costs, exacerbated by ongoing import tariffs. This persistent weakness in manufacturing adds to the argument for the Fed to prioritize economic stimulus over inflation control.
Beyond the immediate impact on the yen and dollar, the broader market is also bracing for a potentially pivotal month. Investors are anticipating the Fed’s final rate cut of the year and are closely watching the confirmation process for a successor to Chair Jerome Powell. The outcome of these events will likely shape the trajectory of U.S. Monetary policy for the foreseeable future.
As of February 16, 2026, the yen had begun the week on a back foot after a strong performance last week driven by easing fiscal worries. However, the dollar remained steady as traders continued to assess the evolving rate outlook. The interplay between the BOJ’s potential policy shift and the Fed’s anticipated moves will continue to be a dominant force in currency markets in the coming weeks.
Looking ahead, the USD/JPY pair remains in focus. Technical analysis suggests support for the dollar around 152.30 yen, with the pair currently trading in the upper 153.00s. However, the release of U.S. Consumer Price Index (CPI) data will be a key event to watch. Expectations are for a 0.3% increase in CPI in January, with the year-over-year rate easing to 2.5% from 2.7% in December. A weaker-than-expected CPI reading could further boost expectations of Fed rate cuts and weigh on the dollar.
Despite the short-term fluctuations, the broader trend for USD/JPY remains bearish, with the Japanese currency poised for its best weekly performance in over a year. The recent landslide victory of Prime Minister Takaichi, while initially met with some market concerns regarding her fiscal policies, has been largely interpreted as a sign of political stability, potentially supporting the Japanese economy and the yen.
The situation remains fluid, and traders are closely monitoring economic data and central bank communications for further clues about the future direction of monetary policy. The potential for a BOJ rate hike, coupled with the possibility of further Fed easing, creates a complex and dynamic environment for currency markets, with the yen and dollar at the center of the action.
