Holders of the Japanese yen likely breathed a sigh of relief at the end of another year. In 2025, the yen managed to slightly gain against the weakened US dollar. After a poor second half of the year (roughly -7.5% against the G10 average), the question remained: would it become the second-worst performing currency in the G10 group?

The yen continues to face pressure from fiscal challenges and escalating tensions with China. In December, a familiar pattern emerged: the Japanese Finance Minister announced that authorities were ready to take decisive steps against currency fluctuations that deviate from fundamental factors. Such warnings tend to intensify whenever the yen weakens sharply. However, actual interventions usually require several weeks of escalating rhetoric, and at the moment, no further sharp decline in the yen seems likely.

The question arises: what part of the yen's movement is inconsistent with fundamentals? By year-end, two factors weighed on it: an unexpectedly large government stimulus package raised concerns about the country's financial stability, and tensions with China intensified. Japanese officials were irritated by the Japanese Prime Minister's statements regarding Taiwan. While his words were not new, merely reiterating previous positions, China appears to have escalated the situation. This week, China imposed export restrictions on dual-use goods for Japan. For an already weak real economy, this is an additional blow.

Currently, it is difficult to predict when the conflict with China will ease or when the yen will recover. It is also hard to imagine that Japan will easily resolve the conflict. Disappointing wage data released this morning make further interest rate hikes even less likely. Those hoping for a significant strengthening of the yen must, for now, wait for the tensions with China to subside. They can only hope that the conflict does not escalate further. Ultimately, the Chinese government could intensify the conflict even more by imposing a full ban on rare earth exports, which would deal a significant blow to the yen.

From a technical perspective, the USD/JPY pair is attempting to break the round level of 157.00 amid overall US dollar strength. If it holds above this level, prices could easily reach the early-year high around 157.30, after which the pair could challenge the round level of 158.00.

On the other hand, support is found at the 14-day EMA around 156.50. Failure to hold this level could push the pair down to the 20-day SMA on the way to the round level of 156.00, below which bulls would gradually start losing control.

For now, however, daily chart oscillators remain positive, suggesting that bulls can still contend with the situation.