Japan’s Prime Minister, Sanae Takaichi, is worried about the country’s ongoing deflation. She pointed out that Japan hasn’t overcome this issue yet and stressed the need for the Bank of Japan (BOJ) to set effective policies to reach a stable price target. Rising food prices might lead to higher inflation, which could hurt the economy. Therefore, Takaichi urged collaboration with the BOJ to encourage wage-related inflation. She warned that wrong policies could push Japan back into deflation, harming consumption, wage growth, and capital investment. The government needs to create conditions that promote continuous wage increases by companies.

Economic Factors Influencing The Japanese Yen

The USD/JPY exchange rate increased by 0.30%, reaching 154.60. The value of the Japanese Yen is affected by Japan’s economic performance, BOJ policies, differences in bond yields, and overall market sentiment. The BOJ’s very loose monetary policy from 2013 to 2024 caused the Yen to lose value. However, as the BOJ slowly shifts from this approach and other central banks lower their interest rates, the differences in bond yields are decreasing. The Yen tends to be a safe-haven investment when markets are unstable, which may increase its value against riskier currencies. Takaichi’s recent statements indicate that we shouldn’t expect aggressive policy changes from the Bank of Japan. Her emphasis on avoiding a return to deflation implies that the government prefers a slow and careful approach to raising interest rates. This cautious attitude is likely to keep pressure on the Japanese Yen for now. Current data shows that Japan’s nationwide core CPI for October 2025 was 2.1%, just above the BOJ’s target. This number is mainly driven by import costs, as real wage growth is negative despite average wage increases of 3.5% achieved during the recent “Shunto” negotiations. This suggests that the inflation is not the sustainable, demand-driven type the BOJ wants before considering further interest rate hikes.

Trading Strategies Amid Economic Uncertainty

For traders of derivatives, the current situation reinforces the existing carry trade. The policy difference between Japan and the US remains significant. The BOJ’s policy rate sits at just 0.10%, while the US Federal Reserve’s rate is much higher at 4.25%. This large interest rate gap makes it advantageous to borrow in Yen and invest in US dollars. The government’s cautious approach sets the stage for volatility in the USD/JPY pair. Traders might want to buy straddles or strangles to capitalize on large price movements, no matter which direction they take. These strategies are ideal for a market where the central bank is reluctant to take action, but currency levels could lead to sudden government involvement. For those with a specific outlook, buying call options on USD/JPY could be beneficial, betting that the Yen will weaken further due to the interest rate gap. The current level of 154.60 suggests that there is still potential for the pair to rise before any official action occurs, making it a popular trade aligned with the economic outlook. However, caution is advised regarding possible currency intervention from the Ministry of Finance, as seen in 2024 when the Yen dropped below similar levels. To hedge long USD/JPY positions, purchasing out-of-the-money put options offers protection against a sudden rise in the Yen if the government decides to intervene. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now