The USD/JPY exchange rate has climbed to about 156.60, thanks to a stronger US Dollar. This increase follows the US Dollar Index reaching its highest weekly level near 98.30, after the release of dovish FOMC minutes that suggest a return to a neutral policy stance. Federal Reserve officials are thinking about easing monetary policy further, even after a recent rate cut of 75 basis points, bringing rates down to between 3.50% and 3.75% by 2025. The CME FedWatch tool predicts an additional 50 basis points cut in 2026.

Influences on the Japanese Yen

The Japanese Yen is under selling pressure due to uncertainty around the Bank of Japan’s (BoJ) short-term policy, even as the government provides fiscal support for economic growth. BoJ officials expect more interest rate cuts as they notice changes in how companies set wages. Factors affecting the Yen include the BoJ’s monetary policy, the difference in bond yields between the US and Japan, and overall market sentiment. Recent shifts in Japan’s policies and international rate cuts are impacting the Yen’s value. During times of market stress, the Yen often has safe-haven appeal, making it a choice for investors seeking stability. As we approach the end of 2025, the US dollar is gaining strength against the Yen, driving the USD/JPY pair upwards towards 156.60. The US Dollar Index also shows a weekly high, indicating that the dollar is broadly strong as we enter the new year. This trend is likely to continue in the near future. The Federal Reserve’s latest minutes suggest they are leaning toward further rate cuts in 2026 to support the job market, particularly after US job growth slowed to 155,000 in November, and unemployment rose to 4.1%. Although these dovish signals are present, the dollar continues to rise because the market has mostly already priced in the Fed’s rate cuts. In 2025, we have already seen the Fed reduce rates by a total of 75 basis points.

Policy Differences and Trading Strategy

Meanwhile, the Bank of Japan is indicating a gradual shift away from its ultra-loose monetary policy, but traders remain doubtful about any immediate changes. Japan’s economy is still weak, with the latest Tokyo Core CPI data for December 2025 at a low 1.5%, well below the central bank’s target. This makes it challenging for the BoJ to raise interest rates significantly. This difference in policies creates a notable interest rate gap, which is a major driver. The yield on a 10-year US Treasury bond is around 3.8%, while the equivalent Japanese government bond is below 1%. This significant difference makes it attractive to hold US dollars and sell Japanese yen, a strategy known as carry trade. For derivative traders, this suggests that the path of least resistance for USD/JPY is still upward. Buying call options with strike prices around 158.00 or 159.00 for the upcoming weeks allows us to gain from the continued weakness of the yen while limiting our potential losses. This strategy helps us stay aligned with the trend, especially as the pair may retest the highs near 160 from 2024. Given the limited trading activity during the holiday season, we should look for any potential dips to set our positions. A small pullback towards the 155.00 level could be an excellent entry point for long-dated futures or bullish options trades. The key is to utilize derivatives to keep our risk defined, as the Fed’s dovish outlook could lead to a sharp reversal if US economic data weakens more than expected in early 2026. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now