USD/JPY dropped to about 157.50 during the early Asian session. This movement is linked to possible US Federal Reserve rate cuts in 2026, driven by easing inflation and a slowing US job market. The Bank of Japan (BoJ) has raised interest rates to 0.75%, the highest in 30 years, indicating a tighter monetary policy. As the market anticipates US Fed rate cuts, the US Dollar has lost value against the Japanese Yen. The CME FedWatch tool shows a 21.0% chance of a Fed rate cut in January. However, the current stance of the Fed limits further losses for the Dollar.

Japanese Economic Recovery

BoJ Governor Kazuo Ueda confirmed that Japan is experiencing moderate economic recovery and stressed the need for careful observation of the economy after the recent rate hike. Although there is no clear guidance on future rate changes, this shift indicates some uncertainty for the Yen’s future. The Yen’s value is influenced by Japan’s economic situation, the BoJ’s policies, and overall market sentiment. As a safe-haven currency, the Yen tends to strengthen during market turbulence, as traders look for stability. With USD/JPY softening around 157.50, it’s important to notice the changing momentum driven by differing central bank policies. The Federal Reserve has already cut rates three times in late 2025 in response to a clear economic slowdown. This trend suggests that the US dollar is likely to weaken. Recent data supports this outlook, making a short position on the currency pair attractive. The US CPI inflation for November 2025 dropped to 2.8%, well below its previous highs, and the latest Non-Farm Payrolls report added just 150,000 jobs. This cooling data strengthens the case for further Fed easing in 2026.

BoJ Rate Hike Impact

On another note, the BoJ’s rate hike to 0.75% marks a significant policy change. Considering the BoJ ended its negative interest rate policy only in early 2024, this move shows a strong commitment to normalization, providing support for the yen. The narrowing interest rate gap is crucial here. The US 10-year Treasury yield has dropped to around 3.75% due to expectations of rate cuts, while the 10-year Japanese Government Bond yield has increased to 1.10%. This narrowing spread has reduced a key support for a higher USD/JPY. In the upcoming holiday-thinned weeks, traders should think about strategies that could benefit from further declines in USD/JPY. Buying put options with a target strike around 155.00 could be a good way to take advantage of downward trends. This method also minimizes risks if Fed officials boost the dollar’s value or if holiday trading leads to significant volatility. However, we must be cautious about the BoJ’s unclear forward guidance, which may limit the Yen’s strength. A fall below the 157.00 level would signal a clear downtrend. On the other hand, if the pair fails to break lower, it might trade sideways as the market waits for the next major event in January. Create your live VT Markets account and start trading now.

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