The US Dollar dropped slightly against the Japanese Yen, staying above 156.00 after the Bank of Japan released its Summary of Opinions. The Yen gained strength following the bank’s meeting minutes, which showed that policymakers are cautious about monetary policy and its economic effects. In December, the Bank of Japan raised its benchmark interest rate by 0.25% to 0.75% but may consider rate cuts in 2026. Concerns remain that the Japanese Prime Minister’s stimulus measures could worsen the fiscal deficit and debt crisis, which would hurt the Yen’s recovery.

Federal Reserve Rate Cuts

The US Dollar is under pressure as the Federal Reserve is expected to cut rates in 2026, even though it initially planned just one cut. The upcoming release of the December meeting minutes might shape the USD/JPY exchange rate in the short term. The Bank of Japan aims for 2% inflation and has maintained a very loose monetary policy since 2013. This approach involved Quantitative and Qualitative Easing and controlling bond yields until March 2024, when rates began to rise. The Yen’s depreciation was mainly due to differing policies with other central banks until this change. Currently, the USD/JPY pair remains supported above the 156.00 level, presenting a delicate balance for the next few weeks. The Bank of Japan is indicating a tighter policy, but concerns about government finances are overshadowing this positive signal for the Yen. This creates uncertainty, making sharp price movements possible in either direction. The recent rate hike to 0.75% by the Bank of Japan is a crucial move, responding to persistent inflation, with Japan’s core CPI for November 2025 staying at 2.8%. This continues the slow normalization process that began in March 2024. However, some Bank of Japan members are calling for caution, making the path to higher rates in 2026 unclear.

Impact of Policy Divergence

Meanwhile, the US Dollar faces challenges as we expect the Federal Reserve to cut rates at least twice in 2026. This is supported by recent data showing that US Core PCE inflation dropped to 2.4% in November 2025, moving closer to the Fed’s target. The upcoming Fed meeting minutes will be crucial for confirming this dovish outlook. The difference in policies, with a tightening Bank of Japan and a loosening Federal Reserve, would usually strengthen the Yen. However, Japan’s fiscal policy complicates this. With Japan’s debt-to-GDP ratio exceeding 265%, Prime Minister Takaichi’s stimulus plans may overshadow the Bank of Japan’s efforts and keep the Yen weak. This situation suggests that traders should prepare for volatility and consider using options strategies to take advantage of price swings instead of betting on a clear direction. It’s important to remember that Japanese authorities intervened in currency markets during 2022 and 2024 when the Yen weakened significantly. Now that we are trading above 156.00, we are in a range that has caught official attention in the past, adding risk for those holding long USD/JPY positions. The potential for intervention creates a cap on the pair, making range-trading or volatility-based derivatives more appealing. Create your live VT Markets account and start trading now.

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