The USD/JPY currency pair is approaching a decisive turning point. After months of dollar strength driven by US exceptionalism, sentiment and data are now shifting—exposing the dollar’s vulnerabilities. Meanwhile, the Japanese yen, long considered the laggard, is showing early signs of structural repricing. This article lays out the full fundamental, sentiment, and technical case for a short USD/JPY position.

US Fundamentals: Growth Cracks and Twin Deficits

The latest US data has delivered a clear wake-up call:

• GDP Growth (QoQ): Shocking contraction of –0.5%, down from +2.4%, confirms a hard landing risk.
• GDP Annual Growth: Slowing to 2.0%, below prior estimates.
• Unemployment Rate: Stable at 4.1%, but job gains are fading and participation is stalling.
• Retail Sales (MoM): Dropped to –0.9%, reflecting consumer fatigue.
• Inflation (YoY): Moderating at 2.4%, with MoM at 0.1% – the Fed’s disinflation path is working.
• Current Account: Deep deficit at –450 billion, or –3.9% of GDP.
• Government Budget: Ballooning to –6.2% of GDP, with no fiscal discipline in sight.

The economic mix suggests the US is losing momentum on both growth and consumption, with structural imbalances (twin deficits) that can no longer be papered over by yield differentials. As inflation retreats, the Fed is increasingly expected to begin cutting rates in early 2026, further eroding USD support.

Japan Fundamentals: Quiet Strength Beneath the Surface

Japan’s macro story is cleaner than it appears at first glance:

• GDP Growth (QoQ): Flat at 0.0%, but annual growth rose to 1.7% – beating market pessimism.
• Unemployment Rate: Stable at 2.5%, a sign of underlying labour tightness.
• Inflation (YoY): Elevated at 3.5%, undermining BoJ’s “transitory” narrative.
• Current Account: Surplus rising to 3.44 trillion yen, now 4.7% of GDP – structural capital inflows support the yen.
• Government Budget: Stable at –5.5%, but not worsening.

Although the Bank of Japan remains behind the curve on normalisation, inflationary pressures and wage dynamics are building domestic policy tension. Markets are starting to speculate on 2026 tightening, and FX is front-running that shift.

Sentiment Analysis: Dollar Losing Its Shine, Yen Attracting Interest

The sentiment environment is turning decisively:

• USD sentiment: Rolling over fast. Markets were long USD on yield and growth divergence—both are now eroding.
• Positioning: Net USD longs are unwinding across majors.
• JPY sentiment: Previously heavily shorted, but now a top candidate for short-covering and rotation.
• Volatility: US asset vol is rising on policy uncertainty and trade war headlines—favouring safe-haven yen inflows.
• Rate expectations: Fed cuts now priced in before BoJ hikes—a reversal from Q1 expectations.

USD/JPY has historically been highly sensitive to US yield curves and risk appetite. With bond markets stabilising and equities under pressure, the pair is vulnerable to downside rotation.

Technical Analysis: Topping Signals Emerging

The daily chart offers early technical validation of a short:

• Ichimoku:
  • Price just above the cloud but Conversion Line has crossed below Base Line (144.93 < 145.27).
  • Lagging Span is inside price, losing upward momentum.
  • Future cloud is flat and thin – signalling trend exhaustion.
• RSI:
  • At 56.88, but showing bearish divergence from recent highs.
  • Failing to break 60-70 zone = weakening momentum.
• MACD:
  • Histogram is flattening; MACD and signal lines converging.
  • Potential crossover brewing, suggesting early trend reversal.
• Volume:
  • Bullish volume is falling, despite higher candles – confirming lack of conviction in upside.

This is a classic distribution structure: upside momentum is fading, and sellers are gaining stealth control. A confirmed break below 145.00 would accelerate downside.

Conclusion

The macro, sentiment, and technical layers are aligning against the dollar and in favour of the yen. USD/JPY is no longer a one-way trade; the cracks in the dollar’s growth and rate story are now visible. Japan’s external position, relative yield potential, and safe haven status all point to a strategic short opportunity.

Bias: Bearish
Timeframe: Medium-Term Swing
Key Break Zone: 145.00
Risk Factor: BoJ policy inertia, US data rebound (unlikely near-term)