The Bank of Japan has raised its key interest rate to 0.75%, the highest rate in 30 years. They have indicated that more hikes could come if the economy performs as expected. However, the yen has weakened because the market thinks the pace of these increases is too slow for a quick recovery of the currency. After this rate change, the USD/JPY exchange rate exceeded 156. Most traders believe the outlook for additional rate hikes next year remains unchanged. The plan for future rate increases has been known for a while, with only two hikes expected in 2025, occurring 11 months apart.

Forecasting Yen Strength

For the yen to gain strength against the US dollar, some conditions need to be met next year. These include better economic growth, stable inflation, and a central bank willing to continue raising rates towards a neutral level. If these factors come together, we could see a stronger yen in the year ahead. This morning, the Bank of Japan raised its key interest rate to 0.75%, marking the highest level in three decades. Even with the promise of more rate hikes, the yen has weakened. The USD/JPY rate has surged above 156 because traders doubt that the Bank of Japan will move fast enough. For short-term traders, this situation presents a good opportunity in the coming weeks. The market’s response shows that the large interest rate difference between the U.S. and Japan is still the main driver. With November’s core inflation reported at a stubborn 2.5% and Q3 GDP growth revised down to just 0.8%, the Bank of Japan has little space to speed up its rate hikes.

Strategy for Yen Weakness

Given this, the short-term strategy should focus on continued yen weakness through the end of the year and into early January. This may involve buying near-term USD/JPY call options or selling JPY futures to take advantage of the current momentum. Traders remember the slow rate hikes from the past year, and they note that the two small adjustments planned for 2025 are almost a year apart. However, we should also prepare for changes in 2026 when various factors might lead to a stronger yen. While following the current trend, it’s wise to look at longer-dated options that could benefit from a major JPY recovery. Buying USD/JPY put options that expire in mid-2026 could effectively position for a future shift. This expected change isn’t only about the Bank of Japan; it’s also linked to anticipated policy changes from the U.S. Federal Reserve. We expect the Fed to hint at rate cuts by the second quarter of 2026, which would help narrow the interest rate gap. This situation reminds us of 2024, when the Fed’s dovish shift was a key factor in boosting the yen. Create your live VT Markets account and start trading now.

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