USD/JPY H2 2026 Outlook: Volatility Constrained by Policy Uncertainty

USD/JPY enters the second half of 2026 with volatility effectively held hostage by competing policy dynamics between the Federal Reserve and Bank of Japan. The pair remains elevated near multi-decade highs, supported by a persistent interest rate differential between US and Japanese government bonds, particularly visible in the 2-year yield spread. The US Dollar Index continues to reflect firm demand for the greenback, while the yen struggles under the weight of Japan's ultra-accommodative monetary policy framework. Despite periodic verbal intervention warnings from Japanese officials, the lack of concrete policy action has emboldened dollar bulls. The H2 outlook suggests range-bound trading may dominate unless either central bank delivers a definitive policy shift. Key factors to watch include potential BOJ normalization signals and any Fed rate cut timelines. Technical levels on the upside remain critical, as a breach of recent highs could trigger intervention risk. Traders should prepare for sudden volatility spikes around central bank meetings and monitor US-Japan yield spreads as the primary directional driver for the pair.