BNY’s Head of Markets Macro Strategy, Bob Savage, reports that Japanese economic activity data has shown improvement, with the Economic Trend Index (CI) for January 2026 rising to 112.1 from 110.4 in December 2025, signaling better future economic conditions [1]. The coincident index also climbed to 117.9 from 114.5, marking its highest level since May 2019 and reflecting current economic strength. This uptick was supported by a 4.3% month-on-month increase in industrial production and a 3.1% month-on-month rise in export volume [1].
Machine tool orders in Japan rose 24.2% year-on-year in February, slightly lower than the 25.3% increase in January. Domestic orders saw a notable jump, increasing by 10.1% year-on-year compared to 2.0% in January, while foreign orders grew 29.8% year-on-year, down from 34.2% previously [1]. These figures collectively suggest a bottoming-out of the economic downturn, with positive momentum in production, exports, and consumer sentiment [1].
Despite these improvements, the USD/JPY exchange rate remains elevated. This reflects lingering ambivalence from the Bank of Japan (BoJ) regarding interest rate policy, as well as global risk dynamics. The minutes from the BoJ’s January meeting indicate concerns about the yen and the need for further rate hikes, but also show uncertainty in the central bank’s approach [1]. Markets are weighing the improving domestic fundamentals against still-wide yield differentials and ongoing safe-haven flows into the US dollar [1].
CONCLUSION
Japanese economic indicators have strengthened, but the yen remains soft due to the Bank of Japan's cautious stance and global risk factors. Market participants are balancing improved domestic data against persistent yield gaps and safe-haven demand for the dollar. The outlook for the yen will likely depend on future BoJ policy decisions and global risk sentiment.