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The yield is approaching the "forbidden zone" of 2%, and the US-Japan exchange rate is fluctuating above 155

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Hello everyone, today XM Forex will bring you "[XM Foreign Exchange Decision Analysis]: The yield is approaching the "forbidden zone" of 2%, and the US-Japan exchange rate is fluctuating above 155." Hope this helps you! The original content is as follows:

On Wednesday (December 17), the Japanese government bond market encountered significant selling pressure, and the 10-year Japanese bond yield broke through a key point, hitting an 18-year high since June 2007. The driving factors mainly www.xmtraders.come from concerns about Japan's future expansion of bond issuance and the unexpectedly weak results of the Bank of Japan's bond purchase operation. At the same time, the USD/JPY exchange rate fluctuated upwards around 155.50. Based on the latest market data and fundamental events, this article will analyze the internal and external reasons for the surge in 10-year Japanese bond yields, and www.xmtraders.combine it with technical indicators to explore its potential impact on the trend of the U.S. dollar against the yen exchange rate in the www.xmtraders.coming week. The core logic lies in how the "passive" and "active" rise in Japanese bond yields is transmitted to the foreign exchange market through two paths: interest rate spreads and monetary policy expectations.

Fundamental context: Fiscal concerns and central bank signals jointly exert pressure

The selling pressure on the Japanese government bond market on Wednesday was not an isolated incident, but the result of a series of recent fundamental factors. The latest and most immediate catalyst www.xmtraders.comes from two directions.

First, fiscal expansion expectations exacerbate debt concerns. According to Kyodo News Agency, Japan’s total expenditure in the draft budget for fiscal year 2026 (starting in April 2026) may exceed 120 trillion yen, up from 115.2 trillion yen for the current fiscal year. Although this news came out yesterday (Tuesday) night, its impact continues to day trading today. Market interpretation believes that in the context of unclear economic growth prospects, continued fiscal expansion will inevitably lead to further expansion of the scale of government bond issuance and increase market supply pressure. This expectation directly led to the weakness of the futures market in the overnight session. Even though the yields of other major bond markets around the world generally fell at that time, it failed to offset Japan'slocal concerns.

Secondly, the results of the Bank of Japan’s routine bond purchase operations were unexpectedly weak, sending a disturbing signal to the market. The Bank of Japan today conducted regular bond purchase operations in multiple years, including 1-3 years, 3-5 years, 5-10 years and 10-25 years. However, the results of all operations, especially those with 10-25 years, were weaker than market expectations. For example, in the 10-25 year operation, although the 20-year current bond (JL194) market was trading at 2.915%, the Bank of Japan's buying results showed that the average yield that participants were willing to sell was as high as 2.931%. This clearly shows that bondholders are very willing to sell to the central bank, far exceeding the price level that the central bank is currently willing to accept. A trader at a Japanese securities www.xmtraders.company www.xmtraders.commented: "The results of the 5-10-year bond purchase operation were not particularly weak, so it was a bit surprising to see 10-year bonds being sold so actively." He further speculated, "Perhaps everyone wants to see the 10-year yield reach 2% before the end of the year." These remarks revealed a general psychology in the market: stimulated by fiscal concerns and marginal changes in central bank operations, traders are actively testing the bottom line of the Bank of Japan's yield curve control (YCC) policy.

These two forces work together, causing selling pressure to be particularly prominent on the 10-year variety. In the afternoon, the 10-year benchmark yield once hit 1.98%, a new 18-year high. It is worth noting that long-term bonds (such as 30-year and 40-year bonds) once gained buying orders during the session as investors swapped positions from low-interest old bonds to high-interest new bonds, but this technical adjustment failed to reverse the overall decline. When 10-year yields soared, sending futures to daily lows, 30-year yields immediately turned higher. This shows that the movement of 10-year yields remains the pricing anchor and sentiment vane of the entire curve.

Technical perspective: The resonance of yields and exchange rates

Judging from the technical indicators provided, the current market is at a critical node.

10-year Japanese bond yield (240-minute chart):

Quote: Latest reported at 1.972%, up 1.08% during the day, with strong momentum.

Bollinger Bands: The quotation (1.972) has been close to the upper rail (1.977), indicating that the price is at the top of a strong upward channel and faces short-term technical resistance. The mid-rail (1.960) forms the intraday support.

MACD: DIFF (0.006) is slightly higher than DEA (0.005). Although it is positive, the difference is very small, indicating that although upward momentum exists, it may be accumulating or facing a direction decision. If DIFF can clearly cross above and distance itself from DEA, it will confirm the strengthening of upward momentum.

USD/JPY (240-minute chart):

Quote: Latest reported at 155.491, up 0.50% during the day, fluctuating in the same direction as Japanese bond yields.

Bollinger Bands: The quotation is above the middle track (155.224), but far away from the upper track (156.137) still has room, indicating that there is some room for the exchange rate to rise, but it has not yet entered the extreme overbought range. The middle rail provides initial support.

MACD: DIFF (0.202) is positive, but DEA (-0.238) is still negative, and DIFF is much higher than DEA. This usually means that the downward trend may have reversed and new upward momentum is accelerating. However, be wary of possible relapses near the zero axis.

The www.xmtraders.combination of technical aspects shows that Japanese bond yields are testing the upper Bollinger Band resistance, while the US dollar against the yen is rising along with it, and MACD shows that the upward momentum of the exchange rate is more positive. The two show a positive linkage, which is in line with the traditional logic of "rising Japanese bond yields -> expected narrowing pressure on Japan-US interest rate differentials -> increasing pressure on yen depreciation (the US dollar rises against the yen)". However, the current rise in yields has obvious overtones of "testing the policy bottom line" and "fiscal concerns", and its sustainability and the central bank's response will be the key to the next stage of linkage.

One-week trend outlook: scenario analysis and logical deduction

Looking forward to the next week, the trend of the 10-year Japanese bond yield and the US dollar against the yen will revolve around the following core variables, and the following probability scenarios may occur:

High probability scenario (baseline scenario): high fluctuations, testing the 2% mark

If the market’s concerns about Japan’s fiscal expansion continue and no Bank of Japan officials release strong verbal intervention signals to curb the rise in yields, then the 10-year JGB yield will remain volatile at the current high (1.96%-1.98% range) and repeatedly test the key psychological and technical threshold of 2.00%. In the meantime, any weaker-than-expected BOJ bond purchases or more details on the budget could trigger a brief breakout. Correspondingly, USD/JPY will be mainly driven by the trend in Japanese bond yields. As long as yields do not fall sharply, USD/JPY will find support and is expected to test the area near the Bollinger Band upper limit of 156.14, and even test the upper edge of the recent fluctuation range. However, declining liquidity at the end of the year could amplify volatility and limit the fluidity of unilateral trends.

Medium probability scenario: Expectations of central bank intervention rise, and yields and exchange rates correct.

If the 10-year yield breaks through 2.0% quickly and resolutely, or the yen exchange rate shows signs of disorderly depreciation (such as the U.S. dollar against the yen rapidly rushing to the 157-158 area), the market's expectations for the Bank of Japan to take action (including increasing bond purchases or conducting fixed-rate bond purchases) will sharply increase. In anticipation of this, some short covering could push yields back off their highs. The U.S. dollar against the yen will also adjust accordingly, with the key support below looking towards the middle track of the Bollinger Bands at 155.22 and the early intensive trading area. The “buy on dips” operation of some accounts before the close of this week has shown that after the sharp market fluctuations, some institutions believe that the current yield level has certain allocation value.

Low probability scenario: Internal and external factors resonate to form a trend breakthrough

If external factors (such as the United StatesEconomic data significantly exceeding expectations, causing U.S. bond yields to surge again) and Japan's internal factors (such as more aggressive fiscal remarks or the central bank showing greater tolerance for rising yields) resonate, which may push the 10-year Japanese bond yield to effectively stand above 2.0%, opening up new upside space. This will significantly change the outlook for Japan-U.S. interest rate differentials and may drive the U.S. dollar against the yen to break through the year's high, forming a new round of upward trend. On the contrary, if global risk aversion suddenly rises sharply (for example, due to geopolitical tensions or global growth concerns), funds will flow into Japanese bonds for safe haven, which may quickly lower yields and push up the yen sharply, causing the dollar to fall against the yen. At present, the triggering conditions for these two extreme scenarios are not yet fully met.

Conclusion: Taken together, the current rise in 10-year Japanese bond yields has shifted from a "passive adjustment" following U.S. debt in the early days to more of an "active upward move" driven by domestic fiscal concerns and testing the bottom line of central bank policy. This gives it greater leverage against the yen. In the short term, the attempt for yields to hit the 2% mark will become the focus of the market, and the result will directly determine whether the U.S. dollar can open up room against the yen. Traders need to pay close attention to the Bank of Japan’s future operational details and any policy statements, which will be a key weight to break the current deadlock and determine the direction of the next stage. Amidst the cautious mood at the end of the year, the market is engaged in a fierce game about the future path of Japan's monetary policy.

The above content is all about "[XM Foreign Exchange Decision Analysis]: The yield is approaching the "forbidden zone" of 2%, and the US-Japan exchange rate fluctuates above 155". It is carefully www.xmtraders.compiled and edited by the editor of XM Foreign Exchange. I hope it will be helpful to your trading! Thanks for the support!

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The yield is approaching the "forbidden zone" of 2%, and the US-Japan exchange rate is fluctuating above 155

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