Etsuro Honda, an economic adviser to Japan’s Liberal Democratic Party, has recommended that the Bank of Japan (BoJ) be careful about raising interest rates. The timing of the next rate hike is still unclear, but Takaichi’s views suggest caution is needed. Currently, the USD/JPY is trading lower at 152.60, down from a recent high of 153.22. The currency’s movement is affected by low inflation expectations, and a weak Yen is currently advantageous for Japan’s economic recovery.

Bank Of Japan Monetary Strategy

The BoJ is responsible for managing monetary policy in Japan and aims for a 2% inflation target to maintain price stability. Since 2013, the BoJ has followed an ultra-loose monetary strategy using Quantitative and Qualitative Easing to boost the economy. In March 2024, it shifted direction by raising interest rates. This long-term stimulus caused the Yen to weaken against major currencies, further impacted by other central banks raising rates. In 2024, the BoJ began changing its strategy due to rising inflation from a weaker Yen and increasing global energy prices. Higher salaries in Japan also played a role in this change. Advisers to Japan’s political leaders are suggesting that the country adopt a careful approach to interest rate increases. This indicates that the Bank of Japan might postpone or slow its monetary tightening in the near future. As a result, the currency market is reacting, with USD/JPY holding just below its recent highs at 152.60. This cautious approach is reasonable based on recent economic data. The core consumer price index for September 2025 showed an inflation rate of 2.1%, just above the BoJ’s 2% target, indicating that inflation is under control. Additionally, GDP growth for the last quarter was modest at an annualized rate of 0.8%, raising concerns that higher borrowing costs could harm the fragile economic recovery.

Cautious Market Approach

For derivative traders, the political pressure on the central bank creates uncertainty, which could lead to increased volatility in the yen. We believe preparing for a potential spike in volatility is a wise move. This could mean buying USD/JPY straddles, which would profit from significant movements in either direction, regardless of whether the BoJ keeps rates steady or surprises with a hike. It’s important to note that the Bank of Japan moved away from its negative interest rate policy only in March 2024. The current interest rate difference is significant, with the US Federal Reserve’s rate around 4.75% compared to Japan’s 0.25%. This gap continues to favor carry trades, where traders borrow yen to purchase higher-yielding US dollars, limiting any major downside for the USD/JPY pair. However, as we near the 155 level, the risk of direct market intervention from the Ministry of Finance increases, as we witnessed multiple times between 2022 and 2024. Traders should be watchful for verbal warnings from officials, which often come before actual yen-buying interventions. A smart way to hedge long USD/JPY exposure could be by purchasing out-of-the-money JPY call options to protect against sudden reversals. Create your live VT Markets account and start trading now.

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