The minutes from the Bank of Japan’s December meeting discuss the need to keep supportive monetary policy while adjusting interest rates as needed. Members highlighted that delaying rate hikes could pose risks due to currency fluctuations affecting inflation. They also noted that if real interest rates drift away from their equilibrium, it could hinder long-term growth.

Monetary Conditions

The board agreed that even with rising rates, monetary conditions would remain friendly to the economy. Some members were concerned that interest rates might stay negative even if raised to 0.75%. There was consensus that further rate increases could happen if the economy performs as expected. Adjusting monetary support was viewed as a way to enhance market stability. Many members argued for a flexible approach to rate hikes, suggesting decisions be based on current economic and market conditions at each meeting. It was acknowledged that the Bank of Japan should look at various factors, like surveys, to evaluate inflation and wage growth. One member recommended a gradual approach to rate increases, suggesting hikes every few months. The Bank of Japan has traditionally kept an ultra-loose policy to boost the economy, leading to a weaker Yen. However, it started to shift this policy as inflation rose above the 2% target, driven by global energy prices and increasing wages. This adjustment has reversed some of the Yen’s previous depreciation. The Bank of Japan is indicating plans to continue raising interest rates, marking a notable change from years of low rates. With Japan’s core inflation data from December 2025 holding at 2.4%, the urge to act remains strong. This suggests that financial instruments betting on a weaker Yen may face significant challenges in the weeks ahead.

Strength in the Japanese Yen

Given this outlook, we can expect further strength in the Japanese Yen. In 2025, similar hawkish signals from the central bank consistently pushed the USD/JPY pair lower from highs above 155. Now trading around 144.50, it seems the pair is likely to trend downward as the interest rate gap with the U.S. narrows. For derivative traders, this means a focus on positioning for a stronger Yen through options is key. Buying JPY call options or USD/JPY put options could prove beneficial, especially since implied volatility may not fully reflect the risk of a rate hike at the next meeting. This situation indicates that the cost of guarding against a declining USD/JPY may still be relatively low. The reasons for higher rates are becoming firmly established in the economy, especially with early signs that the 2026 spring wage negotiations will secure increases above 4%. Even after raising rates in 2025 to 0.75%, Japan’s real interest rates remain in negative territory. This provides the Bank of Japan ample opportunity to continue policy normalization without harming the economy. However, the central bank has stressed that the pace of rate hikes is not set in stone and will rely on incoming data. The positive yet modest GDP growth of 0.3% in the last quarter of 2025 suggests caution. Therefore, traders should be prepared for potential short-term volatility, as the timing of the next hike is still uncertain. Create your live VT Markets account and start trading now.

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