The Japanese Yen weakened after Bank of Japan (BoJ) Governor Ueda spoke at a press conference. He mentioned there’s no rush to raise interest rates, noting that current inflation is largely driven by supply issues rather than demand. Ueda also said the foreign exchange rate is close to their expectations.

Potential For Further Decline

Ueda suggested that current inflation might be temporary. He stressed that sustained inflation is needed to reach their 2% target. The yen’s drop doesn’t seem to worry them, indicating it could decline further if things stay the same. For the yen to gain strength, weak economic data from the US could lead to expectations that the Federal Reserve will take a softer approach. Alternatively, Japan might need to see higher inflation. Signs of more fiscal support could also push inflation up. According to the Bank of Japan’s comments on July 31, 2025, it seems clear that a weaker yen is likely. The Governor’s attention on supply-driven inflation suggests they won’t raise rates anytime soon, encouraging trades that bet against the yen. This view is backed by recent US data—the July Non-Farm Payrolls report revealed a strong gain of 215,000 jobs. With US inflation steady at 3.1%, the Federal Reserve has little reason to cut rates, widening the gap between policies in the US and Japan. The USD/JPY exchange rate is currently around 165.

Trading Strategy Considerations

For derivative traders, this situation suggests buying USD/JPY call options expiring in late August or September. This strategy aims to capitalize on a potential rise towards the 170 level while keeping initial risk limited to the premium paid. Given the current policies of the central banks, this appears to be a high-probability trade. In Japan, recent data supports the central bank’s inaction. The national CPI for June 2025 was 2.7%, but the core-core inflation closely monitored by the BoJ was only 1.8%. This reinforces their cautious approach, waiting for more sustainable price pressures before making any moves. We’ve seen similar situations, especially during the yen’s significant depreciation from 2022 to 2024. The main risk to this trade is intervention from Japan’s Ministry of Finance, which defended the yen around the 160 level in April 2024. Traders should remain cautious and keep an eye on official statements as the yen continues to weaken. Create your live VT Markets account and start trading now.

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