The Japanese Yen is facing challenges against the US Dollar for the second day in a row, with the USD/JPY pair approaching 156.00 during Thursday’s early European session. Concerns about Japan’s financial situation and expectations for a central bank meeting are affecting the Yen. There’s speculation that the Bank of Japan may raise interest rates to a three-decade high of 0.75% on Friday, which could help limit the Yen’s losses.

Market Approach To The Yen

Traders are being cautious with the Japanese Yen ahead of the Bank of Japan’s two-day meeting. Reports indicate that the BoJ will likely continue to raise rates, but the speed of increases will depend on the economy. Comments from BoJ Governor Kazuo Ueda will shed light on future policy decisions. Short-term Japanese government bonds are under selling pressure due to these hawkish expectations. The US Dollar has managed to hold onto recent gains, but its growth potential is limited by expected dovish actions from the Federal Reserve, including possible rate cuts by 2026. Speculation about a dovish, Trump-aligned Fed chair is also impacting the Dollar’s strength. Traders are looking ahead to US consumer inflation figures for more direction. If the USD/JPY pair goes above 156.00, it may continue to rise, supported by technical indicators. There is support around the 100-hour Simple Moving Average at 155.30; dropping below this could lead to further declines. The BoJ’s next press conference is scheduled for Friday, December 19, 2025, at 06:30 GMT, where important policy decisions are expected. With the USD/JPY around 156.00, there’s significant uncertainty as we await the Bank of Japan’s decision tomorrow. Concerns about Japan’s fiscal health are pushing the pair higher, but the market is largely expecting a major rate hike to 0.75%. This uncertain environment could lead the Yen to move sharply in either direction.

Inflation And Policy Divergence

The anticipated BoJ rate hike is in response to ongoing inflation, with Japan’s core CPI for November at 2.8%, above the 2% target. This hawkish policy differs greatly from the United States, where recent consumer inflation figures showed a slight decrease to 2.9%. This reinforces our belief that the Federal Reserve will likely continue moving towards rate cuts in 2026, which should limit the Dollar’s long-term strength. For derivatives traders, this divergence suggests increased volatility is likely. One-week implied volatility for USD/JPY options has already risen above 15%, highlighting market nervousness about tomorrow’s announcement. Strategies that benefit from significant price movements, regardless of direction, such as buying a straddle, could be wise. It’s also essential to consider the risk of government intervention at these levels. The Ministry of Finance directly intervened in the market in late 2022 when the pair approached 150-151. With rates now significantly higher, the likelihood of actions to strengthen the Yen is very real if the BoJ’s announcement disappoints the market and the pair heads towards 157.00. If Governor Ueda makes a hawkish statement tomorrow, a sharp drop below the 155.00 support level is very likely. In this case, put options with strike prices around 154.50 or lower could be profitable as technical selling increases. This scenario would resemble the strong Yen appreciation we observed after the BoJ’s policy shift in late 2024. On the other hand, if the BoJ raises rates but hints at a much slower pace for future increases, the market may interpret this as a dovish hike. This could lead to a rally past the 156.00 resistance level. Traders preparing for this outcome might consider call options with a strike near the 157.00 monthly high. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now