USD/JPY Price Forecast: Iran Strikes Collide With a Treasury Growth Warning and BoJ Tightening

USD/JPY Forecast: The Yen Carry Trade Is About to Get Tested — Iran Strikes Scramble the Playbook, the Treasury Curve Is Bull Flattening Into a Growth Warning, PPI Printed 3.6% But Rate Cut Pricing Actually Rose, the BoJ Is Still Tightening, and Friday's Payrolls Will Decide Whether 155.65 Holds or 152.50 Comes Into Play

Saturday, February 28, 2026 | TradingNews.com

USD/JPY closed Friday near 156.00, down 0.08% on the session, after the U.S. dollar failed to capitalize on a producer price report that should have sent it screaming higher. Core PPI came in at 0.8% month-over-month against a 0.3% consensus — nearly triple the estimate — with the annual rate hitting 3.6% versus 3.0% expected. Headline PPI rose 0.5% monthly and 2.9% annually, both above forecasts. By any conventional logic, a PPI shock of that magnitude should have driven the dollar higher and pushed USD/JPY toward 158 or above. Instead, the pair barely moved. The dollar's inability to rally on the hottest producer inflation print in months is the single most important signal in the FX market right now, and it says something deeply uncomfortable about what the bond market is pricing: not inflation, but a growth collapse that renders inflation irrelevant.

Then Saturday happened. The United States and Israel launched coordinated military strikes against Iran. Iran retaliated with missiles hitting U.S. military installations across the UAE, Qatar, Bahrain, and Kuwait. The Strait of Hormuz — through which 20% of global oil supply and 23% of LNG transit daily — has reportedly been closed by Iranian forces. Oil gapped to seven-month highs before markets shuttered. And USD/JPY, already trapped in a compressing range of lower highs and higher lows, now faces the most consequential Monday open in years, with two diametrically opposed forces fighting for control of the pair.

The Week Ahead — ISM Monday, PCE Tuesday, ADP Wednesday, NFP Friday March 6

Monday brings ISM Manufacturing — and the focus is not on the price component but on employment and new orders. If hiring intentions soften or forward orders roll over, it validates the bond market's growth warning and increases USD/JPY downside pressure. ISM Services follows and will be scrutinized for the same employment and demand signals.

Tuesday's U.S. PCE deflator — the Fed's preferred inflation gauge — is the marquee release before payrolls. Core PCE is expected to show continued disinflation, but Friday's 3.6% core PPI creates upside risk. A hot PCE print cements "no cuts before summer" and temporarily supports the dollar, though the market's behavior on Friday — pricing more easing despite hotter inflation — suggests even a high PCE may not generate sustained dollar strength if growth fears dominate.

ADP private payrolls on Wednesday capture employment trends that the market will parse for evidence of AI-driven job displacement at larger firms. Challenger job cuts will draw attention for the same reason. Nonfarm productivity data will test whether AI-led efficiency gains are showing up as output growth (bullish) or headcount reduction (bearish for demand).

Friday's non-farm payrolls (consensus: 60,000 jobs, 4.3% unemployment) and retail sales are the true test. The unemployment rate arguably offers a cleaner signal than the headline payrolls number, which has been subject to significant revisions. Decent data eases slowdown fears and supports USD/JPY. Disappointing data — particularly a rise in unemployment above 4.3% — validates the Treasury curve's warning and could break 155.65 decisively.

Cleveland Fed President Beth Hammack speaks after both reports. If the Fed wants to shape the narrative around the data, she will be the messenger.

Japan's domestic calendar is lighter, but BoJ communication risk cannot be dismissed. Despite Governor Ueda and board member Himino's recent remarks, the risk of surprise remains elevated. Auctions of 10-year and 30-year JGBs will also be watched closely — earlier concerns about Japan's fiscal position contributed to yen weakness, and any sign of weakening demand for Japanese government bonds could complicate the yen-strengthening thesis.

The Paradox at the Heart of USD/JPY — Dollar Strength From Safe Haven, Yen Strength From Carry Unwind

The Iran conflict creates a paradox for USD/JPY that does not exist for most other currency pairs. On one side: the United States is energy self-sufficient while Japan imports virtually all of its oil and gas. A sustained conflict that pushes Brent crude toward $80 or $90 structurally favors the dollar over the yen because it widens the terms-of-trade gap between the two economies. Japan's current account surplus — a traditional yen support — erodes as energy import costs rise. This argues for USD/JPY higher.

On the other side: a sharp deterioration in global risk sentiment triggers carry trade unwinds, and USD/JPY is the largest carry trade in the world. Japanese institutions and retail speculators hold enormous long positions in dollar-denominated assets funded by cheap yen borrowing. When fear spikes, those positions get unwound — dollar assets sold, yen bought back — and the pair drops violently. The June 2025 precedent is instructive: when "Operation Midnight Hammer" initially struck, USD/JPY sold off sharply as carry trades unwound, even though the energy implications favored the dollar on a fundamental basis.

The question is which force dominates in the first 48 hours. If the conflict is perceived as contained — limited strikes on nuclear facilities without regime change or all-out war — the energy premium favors dollar strength and USD/JPY pushes toward 157.50–158.00. If the conflict escalates further and global risk appetite collapses, the carry unwind dynamic takes over and 155.65 breaks to the downside, opening 154.45 and then 152.50.

The Treasury Curve Is Screaming a Growth Warning — And the Bond Market Is Usually Right

The most important chart in global macro right now is not USD/JPY — it is the U.S. Treasury yield curve. Over the past month, the curve has bull flattened aggressively, with long-dated yields dropping sharply while shorter maturities held relatively firm. This type of move is not associated with confidence in the economic outlook. It signals that the bond market is marking down medium-term growth expectations, pricing a slowdown that goes beyond a routine cyclical soft patch.

The 10-year Treasury yield fell to 3.961% on Friday — a three-month low — despite the PPI shock that, in any inflationary environment, should have sent yields higher. That disconnect is the market telling you that growth fears are overwhelming inflation fears. Bond traders are not worried about prices rising. They are worried about the economy slowing so fast that the inflation data becomes backward-looking noise.

For USD/JPY, this dynamic is bearish. The carry trade depends on the interest rate differential between the U.S. and Japan remaining wide enough to compensate for the risk of holding the position. If the Treasury curve is correct and U.S. growth is decelerating toward recession territory, the Fed will eventually be forced to cut rates regardless of where PPI or CPI prints. Every basis point of Fed easing compresses the U.S.-Japan rate differential and reduces the carry incentive to be long USD/JPY.

PPI at 3.6% Core — And the Market Priced MORE Rate Cuts, Not Fewer

Friday's PPI report was unambiguously hot. Monthly core PPI at 0.8% was the kind of number that, twelve months ago, would have sent rate cut expectations cratering and the dollar surging. Instead, the exact opposite occurred: CME FedWatch pricing for rate cuts actually increased after the release. Money markets now price approximately 50 basis points of easing by year-end 2026. The probability of a June cut has fallen below 50%, pushing the first cut expectation toward July, but the total quantum of easing priced has not declined.

This is extraordinary. The market is looking at 3.6% core producer inflation and concluding not that the Fed needs to stay restrictive, but that the economy is weakening fast enough to force cuts regardless. Growth concerns are overriding inflation data in real time. If that interpretation is correct, USD/JPY downside is significant because the rate differential compression happens even as inflation remains elevated — the worst of both worlds for carry trades, which lose yield support while the economic backdrop deteriorates.

The Fed funds rate sits at 4.75%. Headline CPI remains stubbornly at 2.9%. The Fed cannot cut into inflation running nearly a full percentage point above target without a clear growth emergency to justify it. That emergency may be arriving: the Treasury curve is pricing it, equity markets are wobbling (the S&P 500 is tracking its worst month since March 2025, with Goldman Sachs dropping 7.8% alone), and the AI investment boom that powered the Magnificent Seven rally is facing its first serious questions about ROI sustainability.

The Bank of Japan Is Still Tightening — BoJ Rate at 0.25%, and Ueda Says More Hikes Coming

While the Fed debates when to cut, the Bank of Japan is moving in the opposite direction. The BoJ ended its negative interest rate policy over the past twelve months and has guided its overnight rate to 0.25%. Governor Kazuo Ueda stated explicitly that rates will continue rising if economic projections are met. Board member Hajime Takata reinforced the message by calling for gradual tightening. These are not hypothetical signals — they represent a central bank that has shifted from decades of accommodation to active normalization.

Tokyo CPI for February rose 1.6% year-over-year, with the core measure (excluding fresh food) at 1.8%. The core reading fell below the BoJ's 2% target for the first time since 2024, which could theoretically slow the tightening pace. But the BoJ has demonstrated repeatedly that it is willing to look through short-term inflation volatility and focus on the medium-term wage-price cycle, which remains supportive of further normalization.

For USD/JPY, BoJ tightening creates a structural floor under the yen. Every 10 basis points of BoJ rate increase narrows the U.S.-Japan differential from the Japanese side, complementing any Fed easing that narrows it from the American side. The convergence is slow — 0.25% versus 4.75% is still a massive gap — but the direction of travel is unambiguous. The yen's fundamental anchor is strengthening at exactly the moment the dollar's is weakening.

CFTC Positioning — Yen Longs at ¥11.5K, Down From ¥13.0K, Suggesting Room to Rebuild

Friday's CFTC Commitments of Traders report showed JPY net non-commercial positions at ¥11.5K, down from ¥13.0K the prior week. The reduction in yen longs — likely driven by the BOJ-speculation-fueled rally that briefly sent USD/JPY higher — means the speculative community has reduced its bearish dollar/bullish yen positioning. This creates room for yen longs to be rebuilt if the growth warning from Treasuries materializes and carry trades begin unwinding more aggressively.

GBP net shorts expanded to £-57.1K from £-42.4K, while EUR longs declined to €156.9K from €174.5K and AUD longs grew to $52.6K from $45.9K. The positioning landscape suggests the market is selectively reducing risk exposure ahead of what promises to be one of the most volatile weeks of 2026.

The Technical Structure — USD/JPY Compressing Between 155.65 and 157.50, Resolution Imminent

USD/JPY is trading in a tightening triangle of lower highs and higher lows that has been compressing for weeks. Oscillators are neutral — offering no directional bias — but the pattern itself is a coiled spring that will resolve violently in one direction or the other. The Iran strikes and next week's data calendar provide the catalysts.

Upside: a break above 157.50 would terminate the sequence of lower highs and put the January peak at 159.45 back in play. Above 159.45, the psychologically critical 160.00 level becomes the target — a level that was defended twice in 2024, with the second intervention triggering a reversal of more than 2,000 pips. The proximity to 160 means the Ministry of Finance intervention risk is asymmetric: every pip above 157 increases the probability of verbal or actual intervention, which caps upside momentum even if fundamentals support dollar strength.

Downside: Friday's bounce from 155.65 — where uptrend support intersects with recent price action — marks the near-term floor. A sustained break below 155.65 would shift attention to 154.45, then 154.00, and ultimately to 152.50 where multiple trendlines converge. The 152.50 zone represents a major structural support level that, if broken, would confirm the carry trade unwind thesis and project further yen appreciation toward the 150 psychological handle.

The falling 20-day moving average and the interaction between 5-day, 20-day, and 60-day rolling correlations with Nasdaq futures, VIX, and U.S.-Japan 2-year and 10-year yield spreads all confirm the same message: regime shifts are occurring by the day rather than over weeks, making sustained directional conviction dangerous. Over 5 trading days, USD/JPY correlates most strongly with Nasdaq futures and VIX — pure risk appetite. Over 20 days, the relationship with front-end rate differentials becomes clearer. Over 60 days, all correlations soften. The pair is being pulled in multiple directions simultaneously, and the resolution will be determined by which narrative — growth, rates, geopolitics — dominates next week.

Options Markets Signal Turbulence — Implied Volatility at 9.5% on Three-Month Contracts

Three-month implied volatility on USD/JPY options has risen to 9.5%, reflecting the market's expectation of sharp moves following key data releases and geopolitical developments. Elevated implied vol at that level prices in approximately a 2.4% expected move over the next month — roughly 370 pips from current levels. That range encompasses both the 152.50 downside target and the 159.45 January high, confirming that the options market sees the compression pattern resolving in a major way.

Straddle or strangle strategies — buying both call and put options — capitalize on this expected volatility without requiring a directional bet. For those with a directional view, the continued interest rate advantage of the dollar (4.75% versus 0.25%) technically supports a bullish stance via a bull call spread, but the positive carry must be weighed against the intervention risk above 157 and the carry unwind risk if growth deteriorates.

The Verdict — USD/JPY: Bearish Bias, Sell Rallies Toward 157.00–157.50, Target 154.00–152.50

USD/JPY carries a bearish bias heading into the week of March 2. Sell rallies toward 157.00–157.50 with a near-term target of 154.00–154.45 and a medium-term target of 152.50. Stop above 158.50 on a daily closing basis.

The weight of evidence tilts downside. The Treasury curve has bull flattened aggressively — a growth warning that the bond market rarely gets wrong. Core PPI at 3.6% failed to generate dollar strength, and the market actually priced more easing in response — a clear signal that growth fears are overriding inflation data. The BoJ is tightening while the Fed is on hold and increasingly likely to be forced into cuts. CFTC positioning shows yen longs reduced from ¥13.0K to ¥11.5K, creating room for rebuilding. The technical structure is a compressing triangle that, on fundamental grounds, is more likely to break lower than higher. The 10-year yield at 3.961% (three-month low) despite hot inflation data is the bond market saying the economy is slowing faster than the headline numbers suggest.

The Iran conflict is the wildcard. In the first 24–48 hours, the energy-import vulnerability of Japan could push USD/JPY higher as oil prices spike and the terms-of-trade gap widens. That initial move — potentially to 157.00–157.50 — is the selling opportunity. If the conflict broadens and risk appetite collapses globally, the carry unwind dynamic takes over and the pair reverses hard. The June 2025 precedent: initial energy-driven dollar strength gave way to carry unwind yen strength within days once the scope of the conflict became clear.

The payrolls report on Friday is the fundamental catalyst. A weak number — particularly unemployment rising above 4.3% — breaks the triangle to the downside and sends USD/JPY through 155.65 toward 154.00. A strong number delays the thesis but does not invalidate it, because the Treasury curve is pricing something that payrolls may not yet reflect. AI-driven productivity gains could be masking job displacement that only shows up in subsequent months' revisions — exactly the dynamic that makes headline payrolls unreliable and the unemployment rate the cleaner signal.

The asymmetry favors shorts. Upside is capped by intervention risk above 157.50–160.00 (the MoF defended 160 twice in 2024 with devastating effect). Downside is open toward 152.50 where trendlines converge, and 150 below that if the growth warning validates. The carry trade has provided a floor under USD/JPY for months, but carry only works when the underlying economic differential justifies it. The bond market is saying it no longer does. Sell the rallies.

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