Market Observations By Experts

Analysts from Brown Brothers Harriman say that the Bank of Japan might wait to raise interest rates because inflation is easing. In Tokyo, the Consumer Price Index (CPI) dropped to 1.5% in January from 2.0% in December. It’s predicted that the USD/JPY exchange rate could fall to around 140.00 by the end of the year, driven by differences in interest rates between the US and Japan. The Bank of Japan can take its time with rate changes, allowing for a patient approach. This report is part of a series from the FXStreet Insights Team, who collect market insights from experts to share useful perspectives from various analysts. The recent CPI data for Tokyo shows inflation has decreased to 1.5%, the lowest since March 2022. This gives the Bank of Japan a reason to be patient and hold off on interest rate hikes, reinforcing the large interest rate gap between the US and Japan. Over the next few weeks, this cautious stance suggests that the yen may not strengthen right away. Traders may find it more appealing to hold dollars instead of yen for now. We saw a similar situation in late 2025 when the yen remained weak against the dollar, despite expectations for policy changes. Traders might consider selling short-dated USD/JPY puts to earn premiums, taking advantage of potential range-bound trading.

Expectations For The Future

Looking ahead, the long-term forecast is for the USD/JPY to drop to 140.00 by year-end, mainly due to expectations about the US Federal Reserve. The core inflation rate in the US fell to 2.8% in December 2025, leading the market to expect at least two Fed rate cuts by the end of this year. This narrowing of the interest rate gap between the US and Japan is expected to strengthen the yen in 2026. Given this situation, a practical strategy is to use options calendar spreads. Traders could sell near-term USD/JPY call options to take advantage of the current stability and use the income to buy longer-dated puts with strike prices around 142.00. This approach aims for limited gains in the short term while positioning for a possible significant decline later this year. It’s important to remember the significant interventions by the Ministry of Finance in 2022 and 2023 when the dollar-yen rate exceeded 150. Although officials have been quiet recently, any unexpected rise in USD/JPY might prompt new actions, limiting potential gains. This history sets a ceiling for the exchange rate and supports the idea that the most likely direction is downward. Create your live VT Markets account and start trading now.

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