Morning Market Outlook: Yen Weakness Fuels Nikkei Rally as Records Fall

Markets in Asia resumed trading after the holiday break with strong momentum, led by a sharp rally in Japan. Tokyo stocks jumped around 3% to reach a new all-time high, as investors welcomed a weaker yen and the prospect of even more aggressive fiscal stimulus. Equity markets in South Korea and Taiwan also climbed to record levels, while Chinese stocks rose to their highest point in four years.

Moving in the opposite direction, the Japanese yen sank to record lows against the euro and the Swiss franc, and to multi-year lows against several other currencies. Heavy short positioning in the yen helped stabilize the U.S. dollar, which climbed to around 158.65 and steadied after wobbling on Monday.

Japanese officials responded by stepping up verbal warnings against what they described as “one-sided” moves in the yen, underscoring the risk of currency intervention if the exchange rate approaches the 159.00 to 160.00 range. Such warnings, however, have tended to encourage speculators to continue shorting the yen against other currencies, including the Australian dollar, Mexican peso, and Brazilian real.

In the United States, the earnings season begins with results from major banks, including JPMorgan Chase and Bank of New York Mellon. Expectations are high, which raises the risk of disappointment if management guidance fails to strike an optimistic tone.

Adding to the uncertainty is President Donald Trump’s surprise announcement that credit card interest rates would be capped at 10% starting January 20. The move caught markets off guard, and it remains unclear whether the president has the legal authority to impose such a cap. Nonetheless, past experience suggests that legal ambiguity has not necessarily constrained policy action.

Banks have warned that a cap on credit card rates could result in millions of U.S. households and small businesses losing access to credit. Such an outcome would effectively tighten financial conditions, amounting to a form of monetary tightening—an ironic development given Trump’s continued pressure on the Federal Reserve to cut interest rates more aggressively.

Attention is also focused on the upcoming U.S. consumer price inflation report, which poses a potential hurdle for markets. Analysts have flagged upside risks following November’s unusually low reading, which was distorted by gaps in data collection.

Consensus forecasts point to core inflation rising at an annual rate of 2.7% in December, though some expect a higher reading of around 2.8% as data distortions fade. Inflation readings may remain artificially subdued until April, when a reset in housing cost calculations could trigger a noticeable spike.

Markets have long ruled out the possibility of a Federal Reserve rate cut in January, and the probability of an April cut remains below 50%. A higher-than-expected inflation reading could further reduce the chances of easing by June.

Separately, the U.S. Supreme Court has another opportunity on Wednesday to consider the legality of Trump’s use of emergency powers to impose tariffs. However, major rulings of this scale are not typically issued so early in the year, with April or even June seen as more likely timing.

Looking ahead, next Wednesday is when the Supreme Court is scheduled to hear oral arguments related to Trump’s attempt to remove Federal Reserve Governor Lisa Cook.