The Japanese Yen is stable against the US Dollar, hovering around 158.00 due to increasing fiscal worries in Japan. The Yen is under pressure after Prime Minister Sanae Takaichi announced a plan to dissolve the lower house and proposed suspending the 8% food consumption tax, which has raised concerns about Japan’s public debt. Rising Japanese government bond yields indicate financial stress, which is unusual since higher domestic yields typically provide support. Despite the Finance Minister’s reassurances about Japan’s fiscal stability after a bond sell-off, market participants remain wary of potential currency interventions.

Bank Of Japan’s Monetary Policy

The Bank of Japan is likely to keep interest rates steady in its upcoming meeting, with investors closely watching for future rate signals amid uncertainty in the bond market. In the US, President Trump’s softened view on Greenland during the World Economic Forum helped stabilize the Dollar, despite previous trade tensions. Traders are eagerly awaiting upcoming economic data, including PCE inflation and GDP figures, which will significantly shape market trends as geopolitical and fiscal issues continue to affect these major economies. Reflecting on the political and fiscal concerns from early 2025, worries about the snap election and tax policies pushed USD/JPY close to the 158 mark. This created a high-pressure environment where the yen’s weakness was a major driver. The events highlighted how sensitive the currency is to domestic policy changes. Notably, after reaching those levels in February 2025, the Ministry of Finance made a significant intervention by selling dollars to support the yen. This was similar to the over ¥9 trillion spent in late 2022, providing temporary support for the currency. However, the fundamental interest rate gap between the US and Japan prevented any lasting reversal.

Interest Rate Divergence

As USD/JPY trades near 155, the main issue remains the different policies of the Bank of Japan and the Federal Reserve. The BoJ has slowly followed its December 2024 rate hike with two smaller increases in 2025, bringing the policy rate to 0.25%. Meanwhile, recent US PCE data shows core inflation has cooled to 2.3%, raising speculation that the Fed may signal a shift toward easing later this year. This changing situation suggests that the interest rate difference, while still significant, may have reached its peak. For derivative traders, this means that the profitability of long USD/JPY carry trades is decreasing and the risk of a sharp correction is increasing. We may want to consider using options to prepare for a potential decline in the pair, such as purchasing JPY call options or setting up bearish risk reversals. Given the history of sharp, intervention-driven fluctuations, one-month implied volatility for USD/JPY is currently high at around 11.5%, compared to the sub-8% figures we saw in early 2024. This makes selling options strategies more appealing for those who believe the pair will stay within a range, held between a slowly tightening BoJ and a weakening Fed. Monitoring the cost of options is just as crucial as watching the spot rate. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now