HSBC expects the Japanese yen to weaken soon. They attribute this to risks from U.S. monetary policy, uncertainties in Japanese politics, and the cautious stance of the Bank of Japan. Although inflation and growth forecasts have changed, which might lead to a rate hike, the Bank of Japan is likely to wait on the Federal Reserve’s actions before making any moves. In their note to clients, HSBC highlights two main reasons for their gloomy outlook on the yen. First, the USD/JPY exchange rate is highly influenced by the Federal Reserve’s hawkish approach, positive U.S. economic data, and the Bank of Japan’s dovish stance. Recently, these factors have contributed to the yen’s decline against the U.S. dollar.

Impact of Japanese Government Bond Yields

Second, the USD/JPY exchange rate is also affected by Japanese government bond yields, which are under pressure from local uncertainties. Possible leadership changes in the Liberal Democratic Party and concerns over Japan’s fiscal policies could further weaken the yen if these policies become more accommodating. This highlights the complex situation for the yen, with both global interest rate trends and domestic political risks playing a role in its current weakness. We anticipate downward pressure on the Japanese yen in the near future due to U.S. monetary policy risks and local political uncertainty in Japan. The Bank of Japan is being careful and may wait for the Federal Reserve to act before making its own policy changes, suggesting the yen might weaken further before it strengthens. The USD/JPY exchange rate is very sensitive to strong U.S. economic data, which has been evident recently. For example, the July 2025 U.S. jobs report showed an addition of 215,000 non-farm jobs, exceeding expectations and indicating that the Fed is unlikely to cut interest rates soon. This contrast between a confident Fed and a cautious Bank of Japan continues to push the yen downward. We are also monitoring Japanese government bond yields, which are under pressure due to uncertainties related to the upcoming Liberal Democratic Party leadership election in September. The 10-year JGB yield is currently around 0.95%, reflecting concerns that new leaders may support policies that further weaken the yen. This follows the Bank of Japan’s cautious approach since it implemented its first small rate hike in March 2024 after 17 years.

Opportunities and Risks for Derivative Traders

For derivative traders, this outlook means that buying call options on USD/JPY could be a smart strategy to capitalize on more yen weakness. This strategy would allow traders to benefit if the dollar strengthens against the yen as the pair approaches the 160 level again. The current market also offers chances for strategies that profit from increasing volatility. However, traders should proceed with caution as we approach autumn. There may be a 25 basis point rate hike from the Bank of Japan at its October meeting. Any unexpected decisive action from the Bank could lead to a sudden reversal in the yen’s direction. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now