USD/JPY pressured as stronger yen revives Japan deflation concerns

USD/JPY faces downward pressure as the yen's recent strength raises concerns about Japan's deflation risks, potentially limiting Bank of Japan's policy normalization plans. The pair has declined 1.2% over the past week, testing support near 155.50 as traders reassess BoJ's capacity to tighten policy amid renewed deflationary pressures. Japan's 10-year yield differential with US Treasuries has narrowed to 340 basis points, the tightest spread in three months, reducing the carry trade appeal. The stronger yen poses challenges for Japanese exporters and could undermine the BoJ's efforts to achieve sustainable 2% inflation. Technical analysis shows USD/JPY breaking below the 50-day moving average at 156.20, with next support at 154.80. Market positioning suggests further yen strength if upcoming Japanese CPI data confirms deflationary pressures, though any dovish BoJ signals could quickly reverse gains.