The Japanese Yen (JPY) needs rebalancing after a big drop in Japanese government bonds (JGBs). Even with this need, caution in the market is expected until after the upcoming election. The analysis predicts that JPY flows will improve when the new Diet reviews fiscal policy. Cross-border investment in JGBs remains strong, showing that foreign investors see value in current JGB yields. They are likely to depend on currency authorities in both Japan and the United States to help avoid further devaluation.

Fxstreet Insights Team

The FXStreet Insights Team shares market insights from recognized experts and provides additional analysis. They regularly comment on financial conditions and expected market trends. Besides discussing the Yen, the team covers many financial topics, including predictions about the Bank of Canada’s interest rates and trends in commodities, currencies, gold, and Bitcoin Cash. The goal is to offer clear market insights without giving direct investment advice. There’s a strong signal for buying Japanese Yen after the significant selloff in government bonds. However, with a general election coming in late February, we think the market will hold off on major moves until the new government’s fiscal policy is clear. This creates a period of uncertainty for the next few weeks.

Market Opportunities

Given the political risks, we see a chance to explore volatility. As of late January 2026, USD/JPY options show that implied volatility may not be capturing the chance for a strong move once the election results are known. We can remember the sharp volatility spikes from the Bank of Japan’s unexpected policy changes in 2025 as a reminder of how quickly the market can shift. The foundation for a stronger yen is supported by Japan’s core inflation, which has consistently stayed above the 2% target throughout 2025, finishing the year around 2.5%. A new and stable government may need to adopt policies that tighten monetary policy, potentially driving USD/JPY lower. Using medium-term USD/JPY put options could be a wise way to prepare for this possibility. We also see that cross-border investment in Japanese government bonds remains strong, with foreign investors finding value in yields that have risen to over 1.2%, a level not seen in more than a decade. These investors will need to manage their currency risk, creating a natural demand for JPY call options. This activity could help support the yen, limiting further losses from the current 162.00 level. Create your live VT Markets account and start trading now.

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