The weak yen, combined with rising oil prices due to the conflict in Ukraine, has caused inflation in Japan. Hayashi, the Chief Cabinet Secretary and a candidate for Prime Minister, noted that the Bank of Japan’s policies align with the government’s views. He expressed less worry about the need for a strong yen. Hayashi warned that if the Federal Reserve cuts rates, it could boost the yen against the dollar, which might hurt Japan’s export-driven economy. He pointed out that the weak yen, along with rising oil costs, is driving inflation.

Economic Package Plans

If he becomes Prime Minister, Hayashi plans to create an economic package to help with increasing living costs and provide funds for disaster relief. He stressed that the package should consider Japan’s relatively small output gap to avoid increasing deficit debt. With the US dollar around 168 yen, comments from top Japanese leaders indicating less tolerance for a weak yen raise concerns. The focus on inflation suggests a political shift, possibly leading to a stronger stance from the Bank of Japan. We should expect policies that support a stronger yen, which would help ease import costs and support household budgets. This is backed by recent inflation data, which showed Japan’s core CPI for August 2025 still at 2.7%, above the BOJ’s 2% target. Persistent inflation gives the central bank strong reasons to tighten its policies, especially with political support. The era of prioritizing a weak yen for boosting exports seems to be ending. Given this outlook, traders should prepare for a lower USD/JPY rate in the coming weeks. There is value in buying call options for the yen or setting up bearish risk reversals to benefit from a potential yen strengthening. The difference in policies that has favored the dollar is shrinking, as markets now see a greater than 50% chance of a Federal Reserve rate cut before the end of the year while the BOJ may raise rates.

Market Strategies

Implied volatility in USD/JPY options is likely to increase as the market adjusts to this potential policy change. This indicates opportunities in buying option straddles to profit from expected price fluctuations. We should be ready for more clear warnings from officials, which often come before decisive actions. We recall the interventions in 2024 when the yen fell below 160, marking a significant concern for policymakers. Current statements suggest this threshold hasn’t changed, making official action to strengthen the yen quite likely. Traders should lower their exposure to positions that depend on continued yen weakness. Create your live VT Markets account and start trading now.

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