Japan’s Prime Minister Sanae Takaichi has announced plans to rethink the country’s fiscal target to achieve a basic balance surplus. Instructions for this review will be issued in January. The government wants to regain market trust in Japan’s finances while also encouraging investment for economic growth. A sales tax cut is a possibility, but the immediate focus is on managing rising living costs. The USD/JPY exchange rate is currently at 153.82, down 0.26%. The Bank of Japan (BoJ), the country’s central bank, is in charge of setting monetary policy to maintain price stability, aiming for an inflation rate around 2%. Since 2013, the BoJ has kept policies very loose through strategies like Quantitative and Qualitative Easing. However, in March 2024, the BoJ raised interest rates, indicating a shift from its earlier approach.

The Yen’s Depreciation

The BoJ’s stimulus has led to a weaker Yen against major currencies, a trend exacerbated by differing policies from other central banks. In 2024, the BoJ began to unwind its policies, reacting to inflation that exceeded its target due to a weak Yen and rising global energy prices. Anticipations of wage increases also played a role in their decision. With the government looking to review its fiscal goals in January, there’s new uncertainty for the Japanese Yen. Discussing changes in spending and debt comes alongside the Bank of Japan’s gradual move away from its previous ultra-loose policy. Traders in derivatives should get ready for more volatility as the market assesses whether fiscal and monetary policies will align or conflict. We have closely monitored the Bank of Japan since its major policy change in March 2024, when it ended negative interest rates. The central bank has been slowly normalizing its policies, but the government’s new fiscal direction might complicate matters. If the government opts for more spending or tax cuts, it could lead to higher inflation, forcing the BoJ to raise rates quicker than expected. Core inflation for October 2025 was reported at 2.6%, stubbornly above the BoJ’s 2% target. In contrast, the BoJ’s policy rate sits at just 0.25%, showing limited flexibility. The new discussions around fiscal policy introduce a significant variable that could either help reduce inflation or worsen it.

Market Uncertainty and Strategies

The uncertainty leading up to the January announcement makes options strategies especially important. We should consider buying volatility through tools like straddles on USD/JPY, which would profit from significant price movements in either direction. Implied volatility for contracts that expire in February 2026 is expected to rise as traders factor in this risk. We recall the dramatic Yen weakness experienced in 2022 and 2023 when the policy differences with other central banks were pronounced. Now, the key factors have shifted from solely monetary policy to the interaction between the BoJ and the government’s budget plans, creating a more complex trading environment than before. The idea of a potential sales tax cut, even if it seems far off, is something to watch. A serious move in that direction would likely lead to inflation and further weaken the Yen, pushing USD/JPY back towards the 160 level observed in late 2024. For now, the slight dip to 153.82 appears cautious, but a more significant movement could happen once the government clarifies its true intentions. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now