The USD/JPY pair traded near 155.50 on Tuesday, February 10, currently in a typical repricing phase. While this appears as exchange rate volatility on the surface, it fundamentally reflects a quiet loosening of market confidence in the US dollar. Although the Federal Reserve had implemented multiple interest rate cuts by 2025, driving a 9.4% depreciation in the dollar, this weakening trend did not halt at the start of 2026. Instead, it has intensified due to deeper structural issues.
Analysis indicates that the key to the dollar's weakness lies not in short-term data but in a动摇 of medium to long-term narratives. The "American exceptionalism" that previously supported the dollar's strength is being challenged. A growing number of investors are beginning to question the sustainability of US finances and the ability of the Federal Reserve to maintain its policy independence. Even with the incoming new Chair, Warsh, taking office, the market has not regained confidence. Instead, it is focusing more on whether future policies will be consistent and sufficiently binding. These doubts directly depress the risk preference premium for dollar-denominated assets, making global capital more cautious in its allocation towards the dollar.
More critically, policy uncertainty itself is suppressing the dollar's "risk premium." Historically seen as a safe-haven currency, the dollar's safe-haven attributes are being discounted against a backdrop of high fiscal deficits and frequent political maneuvering. When the market no longer unconditionally believes in the stability of the dollar system, even if fundamentals are acceptable, the exchange rate will提前 reflect this "trust discount."
Why is the Yen Beginning to "Stand Tall"?
In stark contrast to the dollar's weakness, the yen is gradually emerging from the shadows of its own period of weakness. The driver behind the yen's strength is not just a weaker dollar, but a fundamental change in expectations regarding Japan's own policies. The most critical variable comes from monetary policy. There is a widespread market expectation that the Bank of Japan may discuss the scope for interest rate hikes at its April meeting. Although the magnitude of any hike may not be aggressive, simply sending a clear signal—a determination to move away from the era of ultra-loose policy—could be enough to alter the global investment community's valuation logic for yen-denominated assets. The foreign exchange market has always priced in future paths, not just current interest rate differentials. Once the market believes that the core level of yen interest rates will systemically rise, capital will naturally position itself accordingly in advance, pushing the exchange rate to adjust in the opposite direction.
Simultaneously, fiscal issues are becoming a new focal point for yen pricing. Japanese Prime Minister Sanae Takaichi has recently emphasized fiscal sustainability on multiple occasions, explicitly stating the goal of controlling the ratio of debt to economic size and pledging not to finance the planned sales tax cut on food through new bond issuance. While this statement appears to be a technical arrangement, it sends a strong signal of discipline: the government is attempting to rebuild market trust in Japan's public finances. If such policies can be consistently implemented, it could not only help reduce the risk premium embedded in long-term interest rates but may also, in turn, support the yen's exchange rate.
The Real Contest Behind Exchange Rates: A Battle of Trust
The current USD/JPY dynamic is no longer a simple carry trade game of "buy whichever currency offers higher interest rates." It is evolving into a comprehensive contest involving institutional credibility and fiscal discipline. Asset risk dashboards from research institutions show that foreign exchange risk scores have been declining since the start of 2026, even falling to their lowest levels since late 2021. However, this is not because the world has become safer; rather, it is primarily driven by the phase of dollar weakness.
When the dollar corrects, the unwinding of carry trades and adjustments to safe-haven positions often lead to a marginal cooling of foreign exchange volatility. Yet, the underlying risks hidden behind this phenomenon have not disappeared; they are merely temporarily masked. The true bellwether lies in whether the market is willing to continue paying a "premium" for the dollar, and whether it has begun to afford the yen some space for a "discount repair."
Currently, two main narratives are developing simultaneously. On one hand, discussions about Federal Reserve independence and fiscal sustainability continue to depress the dollar's risk premium. On the other hand, expectations for Bank of Japan rate hikes and signals of fiscal anchoring are gradually improving the long-term pricing foundation for the yen. As long as these two forces do not reverse, the trend of USD/JPY slowly converging towards levels below 150 will be difficult to break easily.