Speculation on Japanese Policy

The Japanese Yen is gaining strength due to speculation that Japan will tighten its monetary policy soon. The Governor of the Bank of Japan (BoJ) mentioned that conditions are improving for this change, which supports the Yen. Global market caution and expectations of a BoJ rate hike are also helping the Yen. Next Friday, the BoJ will hold a policy meeting that may influence currency movements further. Today, the US Dollar showed mixed results against major currencies, gaining the most against the Australian Dollar. The heat map illustrates changes among major currencies, showing the USD had a 0.54% drop against the JPY. The current weakness of the US Dollar against the Japanese Yen presents a clear opportunity for us. There’s a big difference here: The Federal Reserve is cutting rates while the BoJ is considering a rate hike. This situation indicates there may be continued downward pressure on the USD/JPY pair. Recent data supports a weaker dollar, especially with jobless claims rising to 236,000. Last week’s Non-Farm Payrolls report for November showed just 165,000 jobs added, which fell short of expectations, confirming a cooling labor market. Moreover, core inflation numbers eased to 3.5% year-over-year, giving the Fed good reason to hint at more rate cuts for 2026, which markets now anticipate.

Japanese Inflation Trends

In Japan, the argument for tightening monetary policy is growing stronger ahead of next week’s meeting. Japan’s national core Consumer Price Index (CPI) has been above the BoJ’s 2% target for over 18 months, last recorded at 2.7% for October 2025. This ongoing inflation gives Governor Ueda the backing he needs to act on his hawkish statements. Due to the high event risk surrounding the BoJ meeting, we should think about buying USD/JPY put options. This strategy allows us to prepare for a significant drop if the BoJ raises rates while keeping our maximum loss limited to the premium paid. Aiming for strike prices below 150.00 seems wise, as breaking this level could speed up selling. We need to note that implied volatility is increasing before the meeting, making options pricier. An alternative strategy is to sell call spreads with strike prices well above the current level, using the premium gained to fund put purchases. This indicates our belief that a sharp reversal upwards is unlikely in this environment. We should also remember the Ministry of Finance’s currency interventions from 2024, when the pair was above 152.00. This historical preference for a stronger yen adds resistance to any potential upward movement. A sustained drop below 150.00 would be technically significant and likely attract more sellers. Create your live VT Markets account and start trading now.

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