The Japanese Yen (JPY) has weakened, dropping 0.2% against the US Dollar (USD) and performing worse than all G10 currencies. This decline comes as traders prepare for Thursday’s North American session, driven by disappointing trade data. The USD/JPY has risen above 158, approaching levels where the Ministry of Finance (MoF) previously intervened. These interventions aimed to address weakness linked to political sentiment, a situation made more complicated by the announcement of an election scheduled for February 8.

Speculation on BoJ’s Next Move

Market participants are worried about what a stronger mandate for Prime Minister Takaichi could mean for the independence of the central bank. There is speculation regarding the Bank of Japan’s upcoming policy decision, set for release early Friday during the Asian trading session, with many expecting no changes. This expected hold in policy comes after instability in Japan’s government bond market. The market is keenly focused on the BoJ’s tone in its announcement, given the current economic uncertainties. The Japanese Yen is under pressure, declining against all major currencies. The USD/JPY has climbed back over the 158 mark, following recent trade data that revealed a larger-than-expected deficit, marking the third consecutive month of negative balances. This ongoing weakness continues to impact the yen. All attention is now on the Bank of Japan’s policy announcement, which is just hours away. While we expect rates to remain steady, the key focus will be on their views regarding inflation and future policy. A dovish tone could push USD/JPY past the 159 mark, testing recent highs.

Market Intervention Risk

There is significant risk of direct intervention by the Ministry of Finance at these levels. Looking back at 2024, we remember authorities intervened with over ¥9 trillion to support the currency when the rate approached 160. Given recent verbal warnings, buying out-of-the-money USD/JPY puts might be a smart way to protect against a sudden, sharp reversal. The upcoming February 8 election is creating uncertainty and weakness for the yen. Concerns are mounting over Prime Minister Takaichi’s potential impact on central bank policy if she gains a stronger mandate. Consequently, one-month implied volatility for USD/JPY has risen above 12%, signaling traders expect a much larger price movement than usual. Considering both the BoJ meeting and the election, traders should explore strategies that could benefit from large price swings in either direction. Purchasing a strangle—buying both an out-of-the-money call and put option—could be effective. This approach would allow for profits whether the pair rises on a dovish BoJ announcement or reverses sharply due to government intervention. Create your live VT Markets account and start trading now.

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