Rate Hikes, Yield Spikes: Is the Yen Ready to Dominate? (USD/JPY Elliott Wave)

BOJ Rate Hikes?

After decades of interest rate suppression, the Bank of Japan turned over a new leaf in March 2024 by raising rates for the first time since 2007.

The rallying cry by the Bank of Japan appears to be growing louder as two additional rate hikes have appeared with the most recent on January 24, 2025. This gives the Bank of Japan three rate hikes in less than one year driving the interest rate from -0.10% to 0.50%.

Another rate hike is anticipated to take place in 2025 which will then drive the target interest rate to its highest level since 1995.

The next rate hike might take place sooner than later. Each rate hike was preceeded with the JP 1-year Bond Yield jumping higher in anticipation of the BoJ rate hike.

Notice how each of the three rate hikes have seen the JP 1-Year Bond Yield jump in anticipation of the rate hike. The BoJ rate hike then meets the 1-Year yield.

The dust has barely settled on the January 24 rate hike and the 1-year yield has rallied up to 0.61%. The closer it gets to 0.75%, the greater the pressure on the next hike.

Subsequent to a generation of interest rate suppression, how might this rate rally impact USDJPY?

USD/JPY Technical Analysis

Our Elliott wave analysis shows a major top appeared in July 2024, just before the second rate hike appeared.

The rally from 2021 was the second zigzag of a double zigzag pattern. The price channel containing the second zigzag was broken later on in July, just as the second rate hike materialized.

Since breaking the support trend line of the channel, USDJPY has rallied back to retest the underside of the line.

Recently, USDJPY has begun to pull away, hinting that the downtrend may be underway again.

Current Elliott Wave Analysis

The main Elliott wave count we are following is that wave ((iii)) is beginning to trend lower. This implies a large decline that carries down to 139 and possibly 128. Once the five-wave sequence is complete, much lower levels could be attained.

This would fit in line with shrinking interest rate differentials between the Japanese Yen and other currencies.

There is an alternative wave count we are following (red labels) that suggests the current decline in 2025 is wave ‘C’ of a large triangle pattern. Wave ‘C’ would find a bottom above 139.57 and likely in the 146-147 range.

Under the alternate count, USDJPY would trade in a large range between 140 to 158.

Bottom Line

USDJPY appears to be declining in a third wave towards 139. If USDJPY stalls near 146-147, then we’ll consider the possibility of the alternate wave count, a triangle.

Due to multi-decade highs in Japan interest rates, a large decline in USDJPY is the pattern to consider.

Short-Term Bias: Bearish

Long-Term Bias: Bearish

Key Level for Bearish Bias: 158.87

Initial Target: 139

Secondary Target: 128