The Bank of Japan recently voted on interest rates, with two policymakers, Takata and Tamura, calling for a 25 basis point increase. Ultimately, the decision resulted in a 7-2 majority to keep rates stable. This added a hawkish tone, contributing to the yen’s rise. In another development, the Bank of Japan plans to sell its ETF holdings, estimated at about ¥37 trillion. They intend to sell around ¥330 billion worth of ETFs each year, which means it would take about 112 years to completely unwind these holdings at that rate. The central bank mentioned potential adjustments in the future but assured that significant disruption is unlikely.

Domestic Market Reaction

The domestic market responded with a decline in Japanese stocks, further boosting the yen’s strength amid discussions on monetary policy. The USD/JPY fell to approximately 147.27, challenging its 200-hour moving average of 147.25. Buyers are looking to maintain their position after a rebound following the Federal Open Market Committee meeting. Overall, USD/JPY is fluctuating between its 100 and 200-day moving averages. For a new trend to form, a decisive break from this range is necessary, as the pair has lacked clear direction in recent weeks. The key takeaway is that the Bank of Japan is adopting a more hawkish approach, even while keeping rates steady for now. The dissent from two policymakers advocating for a rate hike signals increasing internal pressure to tighten policy. History shows that similar dissent has preceded changes in policy by the Fed and ECB in the late 2010s, which is notable. Although the plan to sell ETF holdings is receiving attention, its immediate impact on the market is minimal. Selling ¥330 billion per year from a large ¥37 trillion portfolio is more symbolic than impactful. The Federal Reserve’s quantitative tightening since 2022 shows that central banks prefer a slow and predictable pace to avoid upsetting markets.

Impact on Japanese Stocks

Despite its symbolism, this plan is contributing to a drop in Japanese stocks, with the Nikkei 225 index falling over 1.8% in today’s trading session. This decline in equities is strengthening the yen as money shifts to safer assets. The pattern of a weaker stock market bolstering a stronger yen has been consistent throughout 2025. For derivative traders, this trend indicates a growing bias toward a stronger yen in the coming weeks. Increased uncertainty has led to a rise in one-month implied volatility on USD/JPY, jumping from around 7.8% to 9.5% this morning. This makes purchasing USD/JPY put options an attractive strategy in anticipation of a potential downward move. Technically, USD/JPY remains within a range, but the fundamental case for a breakdown is strengthening. We should monitor the pair’s 200-day moving average, currently around 146.50, as a key support level. A sustained drop below this could pave the way for a test of the lows near 144.00 we saw earlier this summer. Create your live VT Markets account and start trading now.

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