The USD/JPY exchange rate fell to about 152.15, a drop of 0.47%, as the Japanese Yen showed strength. This decrease is related to improvements in US-Japan trade ties, following new investments and cooperation agreements between the two countries. Japan has announced a $550 billion investment plan focusing on energy and infrastructure in the US. A new agreement on minerals and rare earths aims to secure supply lines and reduce dependence on China. Japan’s Economy Minister emphasized the importance of stable exchange rates to protect households and businesses from potential effects.

Bank of Japan’s Monetary Policy

The Bank of Japan (BoJ) is likely to keep its benchmark rate at 0.50% in the upcoming policy meeting. In contrast, the Federal Reserve may lower rates by 25 basis points, which could weaken the US Dollar. At the same time, political uncertainty in the US, due to the government shutdown and criticism of the Federal Reserve Chair, has negatively impacted sentiment. In this situation, the US Dollar is not as strong, while the Yen benefits from diplomatic progress and the BoJ’s policies. Overall, the market is unsettled as currency values change with global events. The significant drop in USD/JPY indicates a clear divide in policy direction. The Federal Reserve is hinting at a rate cut this week, supported by the latest US Core PCE inflation data from September 2025, which is at 2.5%, close to the Fed’s target. This easing contrasts sharply with the BoJ’s approach of maintaining rates, making the Yen stronger by comparison. The renewed trade and diplomatic ties provide solid support for the Yen. Japan’s large investment plans in the US, especially in key sectors, reduce geopolitical risks and bolster its economic position. This marks a shift from the tensions seen in previous years, giving traders good reasons to be optimistic about the JPY, not just as a safe-haven currency.

Political Factors Impacting the US Dollar

On the other hand, ongoing political issues from Washington are dragging down the US Dollar. We’ve seen similar situations before; during the US government shutdown in late 2018, the Dollar Index (DXY) dropped nearly 2% in the following month. This historical pattern suggests the current shutdown could continue to weaken confidence in the Dollar for weeks. For those trading derivatives, this environment suggests considering short positions on USD/JPY. Buying put options on the exchange rate allows traders to profit from potential declines while managing their maximum risk before central bank meetings. Implied volatility is high, but the strong momentum from both monetary policy and political factors may justify the costs. We also need to look at the unwinding of the carry trade, which has been profitable for years. As the interest rate gap between the US and Japan narrows with the Fed’s interest rate cut, holding long USD/JPY positions becomes less appealing. This situation forces traders to sell off those positions, creating more downward pressure on the currency pair. Create your live VT Markets account and start trading now.

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