The USD/JPY exchange rate rose to 155.45 as markets expect the Bank of Japan (BOJ) to raise rates by 25 basis points on December 19. This expectation comes from fiscal stimulus and possible increases in Japanese wage growth. Analysts at BBH FX believe the long-term fair value should trend towards 140. Recent data shows mixed results for Japan’s cash earnings in October. Year-on-year, labor cash earnings increased by 2.6%, up from 2.1% in September. However, scheduled pay growth for full-time workers was 2.2% year-on-year, slightly down from 2.3% in September. Though wage growth in Japan isn’t putting pressure on inflation due to only 0.7% productivity growth, there might be room for higher wages. The UA Zensen union is aiming for a 6% wage increase for regular employees after previously agreeing to a 4.75% raise in 2025. There’s a 90% chance the BOJ will raise rates by 25 basis points to 0.75% on December 19. A tighter monetary policy and Japan’s new fiscal stimulus package could strengthen the yen, potentially moving the USD/JPY toward 140, as suggested by bond yield spreads between the US and Japan. As of December 8, 2025, the USD/JPY is nearing 155.50, with the market almost certain of a BOJ rate hike on December 19. This situation suggests that the BOJ’s guidance, rather than the hike itself, might drive the next significant market movement. Consequently, preparing for increased volatility is essential in the coming days. With a 90% chance of a 25 basis point hike already factored in, attention is turning to the BOJ’s messaging, making options strategies more appealing. We noted implied volatility for USD/JPY rose above 25% when the BOJ changed its policy in July 2023, indicating a pattern we might observe this time. Buying at-the-money straddles that expire after December 19 could capture a big market move, no matter the direction. To prepare for a long-term decline towards the 140.00 fair value, consider buying JPY call options that expire in the first quarter of 2026. Historically, the gap between the current exchange rate and the level suggested by US-Japan two-year yield spreads eventually closes. This spread has narrowed by over 50 basis points this year to 3.8%, increasing the pressure on the pair to drop. On the other hand, a “dovish hike” could disappoint yen bulls and push USD/JPY past the resistance level of 156.12. Japan’s productivity growth, which has struggled to exceed 0.8% annually from 2022 to 2024, poses a challenge for aggressive tightening. Short-dated USD call options can be used to bet on this potential upside surprise. For those already holding long USD/JPY positions, it’s crucial to hedge against a sharp decline before the December 19 meeting. The UA Zensen union’s plan for a 6% wage increase builds on the significant 5.28% raise achieved in the 2024 Shunto negotiations. Using put option spreads can offer downside protection in a cost-effective way.

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