The Japanese yen traded near a one-week high against a weaker US dollar on Tuesday in Europe. It extended a two-day rise. Japan’s snap election result cut political uncertainty. Official warnings about possible currency action, and hopes for more Bank of Japan (BoJ) policy normalisation, also supported the yen. Prime Minister Sanae Takaichi’s Liberal Democratic Party won 316 of 465 lower-house seats on Sunday. This was the first time a single party has held a two-thirds supermajority since Japan’s parliament was formed in 1947. The result gives the government more room to pass laws, even if the upper house resists. It also supports plans for higher spending. That raised concerns about Japan’s public finances and limited yen gains. Risk appetite improved, and Middle East tensions seemed to ease. Officials repeated that Japan could act against moves they see as out of line with fundamentals. This helped cap USD/JPY. Finance Minister Satsuki Katayama and currency diplomat Atsushi Mimura said they were watching markets closely. The dollar stayed weak as markets priced in two US Federal Reserve rate cuts this year. At the same time, traders still expected more BoJ tightening. Reports and comments also raised doubts about Fed independence. Bloomberg also said Chinese regulators told institutions to curb US Treasury holdings. Traders watched US retail sales on Tuesday. Attention then shifted to US nonfarm payrolls and consumer inflation on Friday. Key technical levels mentioned were 155.60–155.50 support, RSI at 39, and 154.91 as another downside level. Looking back at sentiment from late last year, many made a strong case for a weaker USD/JPY. The argument was based on BoJ policy normalisation and threats of intervention. This followed Prime Minister Takaichi’s clear election win, which first lifted the yen. Many expected the yen to keep rising from around 155 per dollar. However, the BoJ has been more cautious than markets expected in 2025. It did move away from ultra-loose policy, but the key policy rate is still only 0.25%. That is a much slower pace than many traders had priced in. With such a low yield, the yen looks less attractive than other currencies. In contrast, the US Federal Reserve did not cut rates as much as many predicted in late 2025. Services inflation stayed stubborn. Core PCE in January 2026 came in at 2.7%, which limited the Fed’s ability to make deep cuts. The rate gap between the US and Japan therefore remains wide. That has revived the carry trade that tends to favour the dollar. For derivatives traders, this means the setup has changed a lot from what people expected late last year. USD/JPY did not break below 155 and later rebounded, recently trading near 158. With such a wide rate gap, staying long USD versus JPY still has a strong fundamental case. The risk of intervention by Japanese authorities—seen in October 2025—has also kept implied volatility high. That makes selling USD/JPY options less appealing, because sudden large moves are still possible. Instead, traders may prefer strategies that can benefit from a gradual rise, while limiting the damage from an intervention shock. One approach for the next few weeks is to buy USD/JPY call options or call spreads. This can profit from further gains driven by the rate gap. Another approach is to hold a long USD/JPY spot position, but buy out-of-the-money put options for protection. That lets traders take part in the carry trade while setting a floor in case authorities intervene again.

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