The Japanese yen experienced a noticeable sell-off early Monday as markets reacted to Japan’s fourth-quarter GDP report, sending the USD/JPY exchange rate surging above ¥153, reaching a session high near ¥153.30. The GDP figures revealed a mere 0.1% growth for the quarter, following a more significant 0.7% contraction in the third quarter of 2025. Although this slight expansion helped Japan avoid a technical recession—defined as two consecutive quarters of shrinking output—it fell short of economists’ expectations, who had anticipated a more robust rebound of 0.4%.
In annualized terms, Japan’s growth was recorded at 0.2%, substantially lower than the forecast of 1.6% and only a modest improvement from the previous quarter’s decline of 2.3%. While the data may indicate some stabilization, it raises concerns about the underlying momentum of the nation’s economic recovery.
The Bank of Japan (BOJ) recently revised its growth outlook for the fiscal year 2026 upward to 0.9%, citing supportive government stimulus and relaxed financial conditions as factors for moderate expansion. Despite the cooling inflation rate, which dropped to 2.1% in January—the lowest figure since March 2022—price levels have remained above the BOJ’s 2% target for 45 consecutive months. This persistent inflation suggests that the central bank may be contemplating a gradual normalization of its monetary policy.
Analysts are currently speculating that the next interest rate hike could occur in the spring. A rate increase is generally seen as a factor strengthening a currency, as higher yields attract foreign capital. However, today’s lackluster GDP data complicates this scenario for the BOJ.
The dynamics of the dollar-yen exchange rate are heavily influenced by yield differentials between the United States and Japan. With U.S. interest rates still elevated while Japan adopts a cautious approach, the prevailing gap significantly favors the dollar. The modest GDP rebound portrays a picture of a slow-moving BOJ, which is likely to keep Japanese yields contained, further limiting any potential support for the yen in the near future.
As long as U.S. economic indicators show strength and Japan’s recovery remains fragile, traders are eyeing potential rallies in the dollar-yen exchange rate towards the mid-150s. Additionally, there are whispers of possible intervention strategies by Japanese authorities lurking in the background, adding another layer of complexity to the currency’s performance.
