Bank of Japan Governor Kazuo Ueda hinted that the meeting on December 19 might finally lift the long pause in interest rate hikes. This is due to ongoing inflation and new government spending. As a result, markets now see a greater than 80% chance of a rate increase in December, which has strengthened the Japanese Yen (JPY) and may lead to a more robust currency through 2026, according to Commerzbank analyst Antje Praefcke. In Nagoya, Ueda mentioned that the central bank is considering raising interest rates, taking into account economic activity, prices, and market trends. After his remarks, the market adjusted its expectations, greatly enhancing the yen’s value against the dollar. The probability of a rate hike in December is now over 80%, with January as another possibility.

Interest Rate Expectations and Government Support

The new government appears to back the Bank of Japan, as noted by Finance Minister Satsuki Katayama. Analysts believe that a rate hike could mark the start of a better period for the yen in 2026. With the market pricing in over an 80% chance of a Bank of Japan rate hike on December 19, the yen is likely to rise. Japan’s core CPI has remained stubbornly above the 2% target for nineteen consecutive months, with the latest figures from November 2025 showing a 2.9% year-over-year increase. This ongoing inflation, along with the government’s new fiscal measures, gives the central bank a strong reason to take action. This shift in policy is already visible in the spot market, where USD/JPY has fallen from nearly 155 last month to below 148 today. This rapid change indicates that long-held carry trades, relying on a weak yen, are being quickly unwound. Derivative traders should see this as the start of a larger trend, not just a fleeting reaction.

Volatility and Strategic Opportunities

The options market is indicating expectations of substantial movement in the weeks ahead. One-month implied volatility for USD/JPY has reached its highest point since the bond market disruptions of early 2024, suggesting traders are gearing up for a major breakout. This setting favors strategies that harness both a rising yen and increasing volatility. Looking back at how the Euro reacted when the ECB began its tightening cycle in 2022 can provide insights into what to expect for the yen through 2026. Therefore, traders might want to buy JPY call options or consider bearish positions on USD/JPY through put options to take advantage of this anticipated policy change. The opportunity to position for these moves before the official announcement is quickly closing. Create your live VT Markets account and start trading now.

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