Japanese Yen Faces Headwinds Despite Undervaluation

The Japanese Yen remains under pressure against the US Dollar, recently testing 155.00, driven by a hawkish shift in the Federal Reserve's stance revealed in the FOMC minutes. While several analysts, including DBS, identify the Yen as significantly undervalued and poised for potential recovery, particularly following the LDP’s election victory and clarification of fiscal plans, recent Japanese inflation data complicates the outlook. January's CPI fell below the Bank of Japan’s (BoJ) 2% target, tempering expectations for an April interest rate hike, despite markets still assigning a high probability to such a move. Societe Generale notes solid service-sector inflation supports BoJ policy normalization. The USD/JPY is also influenced by geopolitical factors, though the Yen’s safe-haven appeal is currently overshadowed by Dollar strength. EUR/JPY is testing key resistance levels, while AUD/JPY benefits from interest rate expectations and weaker Yen. Upcoming economic data releases, including PCE, GDP, and PMIs, will be crucial. Japan’s FY26 budget debate and potential consumption tax adjustments are also key factors to watch.