... Trade Reviews Inflation risks and depreciation push yen toward key resistance

Inflation risks and depreciation push yen toward key resistance

The Japanese yen is currently testing a critical technical resistance level as renewed inflationary pressures emerge from volatility in global energy markets.

By Daniel Mejía | 2h ago

The Bank of Japan (BoJ) is facing a dual challenge from the persistent depreciation of the yen against the US dollar and escalating energy costs resulting from the intensifying conflict in the Middle East.
Although the headline inflation rate currently stands at 1.5%—near the BoJ’s target—the combination of a weakened currency and rising energy prices threatens to trigger a significant rebound in the consumer price index.
The USD/JPY pair is testing a prominent structural resistance, following a sustained upward trajectory that continues to undermine the Japanese currency’s valuation.

Depreciation pressure and renewed inflationary concerns drive USD/JPY higher

The Japanese yen has weakened to the ¥159.30 level against the US dollar. Japan’s ¥1.15 trillion trade deficit in January—reported on February 17—has intensified concerns over imported inflation. Over the past decade, Japan’s trade balance has remained in deficit for the majority of reporting periods; consequently, prolonged currency depreciation has historically undermined price stability. While the current inflation rate of 1.5% is modest, it is relevant to note that price growth has aligned with the Bank of Japan’s target for only two months of the current cycle.

Simultaneously, the escalating conflict involving the US, Israel, and Iran has triggered a sharp appreciation in energy prices, particularly oil and gasoline. Over the past month, the Brent crude benchmark has surged by approximately 45%, currently trading above the $100 per barrel threshold. This heightens the risk of an inflationary rebound, particularly if the conflict persists for several weeks or months, as suggested by recent rhetoric from Iranian officials. For the BoJ, the primary objective remains the close monitoring of the yen’s trajectory and the evolving geopolitical landscape in the Middle East.

In response to these developments, the USD/JPY pair appreciated by 0.36%, reaching the ¥159.30 level.

Figure 1. Japan Balance of Trade (2016–2026). Source: Data from the Japanese Ministry of Finance; Figure obtained from Trading Economics.

Technical analysis of the USD/JPY pair

From a technical perspective, the USD/JPY pair is exhibiting bullish momentum as it tests a key resistance level within a long-term consolidation pattern. Key observations include:

Trend Context: In the long term, the pair remains confined within a broad consolidation range, reflecting persistent market indecision. However, the medium-term trajectory maintains a technically bullish structure—characterised by a sequence of higher highs and higher lows—as price action challenges a significant resistance ceiling.
Resistance Levels: Should the immediate short-term resistance at ¥160 be breached to the upside, the next major technical ceiling is the long-term peak of ¥161.50. A decisive break above this level would signal the potential for further extension into higher price territories.
Support Levels: If the short-term support at ¥152.50 is invalidated, the next critical floor is identified at ¥151. This level serves as a structural pivot point and is currently situated near the 200-day moving average. A breach of the ¥151 zone would significantly increase the probability of a deeper market correction.
Momentum Indicators: The Moving Average Convergence Divergence (MACD) is on a rising trajectory, suggesting that bullish momentum may be strengthening. Conversely, the Relative Strength Index (RSI) is currently trading near overbought territory, indicating potential resistance to further immediate upward movement.