The Bank of Japan’s recent decision to raise its policy rate by 25 basis points didn’t strengthen the Japanese Yen. Instead, the USD/JPY exchange rate climbed above 157.00, its highest level in almost a month. The Bank’s messaging was less forceful than expected, which may have influenced how the market reacted, despite the insights from Rabobank’s FX analyst. The BoJ’s statement hinted at future rate increases based on economic conditions and prices, but it lacked strong confidence. This means the yen might still be considered an attractive funding currency, especially without a robust response from the BoJ. Many analysts predict that most G10 central banks will finish their easing cycles by next year, which will affect interest rate differences.

Market Reactions and Predictions

Even though there were hopes that the yen would benefit from higher rates and investments, worries about fiscal policies and the yen’s role as a funding currency persist. As a result, the forecast for USD/JPY has been updated to 145 within the next 12 months, an increase from the earlier estimate of 140. The BoJ’s choice to raise interest rates has surprisingly weakened the yen, leading the USD/JPY rate to rise past 157.00. This response indicates that traders were let down by the central bank’s cautious stance on future increases. Traders should see this as a signal for further yen weakness in the short term. The main factor driving this situation is the large difference between interest rates in the US and Japan. November 2025 inflation data in the US shows a firm rate of 2.9%, with the Federal Reserve’s policy rate at 3.75%. In comparison, Japan’s rate has just increased to 0.25%. This gap makes it very profitable to borrow yen to purchase dollars, creating a carry trade that will likely keep putting pressure on the yen. In the upcoming weeks, we see good chances to buy call options on USD/JPY, aiming for strike prices between 158.00 and 159.00. Data from the Commitment of Traders report shows that speculative short positions against the yen are near multi-year highs, indicating a crowded but strong trend. The market is betting that the Bank of Japan will be slow to react through the first quarter of 2026.

Risk of Government Intervention

However, traders should stay alert for potential government intervention. Japanese officials acted to bolster the yen in 2022 and again in 2024 when the currency fell past key psychological levels. It’s crucial to set tight stop-loss orders or use defined-risk option strategies as the exchange rate approaches the 160.00 level, which could trigger official action. While the yen is expected to remain weak in the short term, its long-term outlook is different, with our 12-month forecast now at 145. This indicates that while we can profit from the current upward trend, it may be wise to consider long-term put options to prepare for a potential reversal next year. We’re in an environment where we can capitalize on upward momentum while being ready for a quick and sharp change. Create your live VT Markets account and start trading now.

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