USD/JPY is currently trading near 153.00, marking its seventh consecutive day of gains even though the US Dollar is weaker. The Yen has been the worst G10 currency this month, facing pressure from Japan’s fiscal and policy situation. Traders are paying close attention to the Bank of Japan (BoJ) and the Federal Reserve (Fed) decisions happening this week. The BoJ is likely to keep its benchmark interest rate at 0.50%, while the Fed is expected to announce another rate cut.

BoJ Rate Hike Probability

There is about an 11% chance that the BoJ will hike rates this week, but a quarter-point increase is expected by early 2026. The central bank is considering economic conditions and the impact of Japan’s proposed fiscal stimulus. The Fed’s meeting starts on Tuesday, with a rate cut almost guaranteed. This would follow a reduction in September, the first since December 2024, aimed at supporting the economy amidst workforce concerns. The ongoing US government shutdown has delayed important employment data, impacting insights into the labor market. However, recent Consumer Price Index data has raised hopes for continued cuts from the Fed. Volatility in USD/JPY might rise as both central banks meet. The pair is expected to remain on an upward trend, influenced by Fed rate cuts and the BoJ’s cautious approach toward fiscal growth.

Interest Rate Dynamics

We see a clear policy split between the Federal Reserve and the Bank of Japan. The Fed is expected to cut rates this week while the BoJ holds steady, creating a favorable interest rate difference for the US Dollar. This situation supports strategies that benefit from a higher USD/JPY, such as buying call options. US economic data supports the Fed’s cautious approach to easing, which began with a rate cut in September 2025. Core PCE inflation, the Fed’s preferred measure, has dropped to 2.6% from above 3% earlier in the year, though it remains above the target. This slow decline gives the Fed room for “risk-management” cuts without signaling a full-blown recession, keeping the dollar relatively strong. In contrast, the Yen’s weakness stems from Japan’s domestic challenges. Real wage growth has been negative for over two years, with the latest Ministry of Labour data showing a 1.2% year-over-year decline after adjusting for inflation. This situation hinders the BoJ from raising rates aggressively, even as they consider Prime Minister Takaichi’s fiscal plans. Upcoming central bank meetings have raised expected volatility, making options pricier. Traders might consider selling JPY put options to collect premiums, betting that USD/JPY won’t drop significantly. Alternatively, buying long-dated call options allows participation in the upward trend while limiting potential losses. However, we must stay vigilant about the risk of intervention from Japanese authorities as USD/JPY approaches the 153.00 level. Significant intervention to support the Yen occurred in the fall of 2022 and again in the spring of 2024 when the currency weakened past similar thresholds. This makes outright long positions risky, favoring defined-risk option strategies like call spreads to protect against a sudden reversal. Create your live VT Markets account and start trading now.

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