The Bank of Japan (BoJ) intends to keep increasing interest rates if the economy and prices meet predictions. BoJ Governor Kazuo Ueda believes that changing monetary support will aid in achieving steady growth. Japan’s economy is expected to maintain a cycle of moderate wage and price increases. Following this announcement, the USD/JPY has risen by 0.18%, now trading at 157.15. The BoJ, which is Japan’s central bank, sets monetary policy and strives for stable prices with an inflation target of around 2%.

Monetary Policy History

In 2013, the BoJ adopted a very loose monetary policy to boost the economy and inflation. This included Quantitative and Qualitative Easing, and, since 2016, negative interest rates and control over bond yields. In March 2024, the BoJ began changing these policies by raising interest rates. Japan’s Yen weakened against major currencies due to this significant stimulus. This trend worsened in 2022 and 2023 since other central banks raised rates to combat inflation. In 2024, the BoJ’s policy changes started to reverse this trend. A weaker Yen and rising global energy prices drove Japanese inflation above the BoJ’s target. Expected salary increases also played a role, leading the BoJ to move away from its very loose policies. The Bank of Japan is indicating that more interest rate increases are likely, depending on economic data. Given the latest inflation and wage information, we should pay attention to these comments. This points to a major shift in monetary policy, which could create new opportunities.

Financial Market Implications

Core inflation in Japan has remained above the 2% target, with the latest data for December 2025 showing a 2.3% year-over-year increase. This is supported by strong wage growth from last year’s spring negotiations, which averaged over 3.8%, the highest in thirty years. These conditions align with the central bank’s criteria for tightening policy further. With the USD/JPY trading above 157.00, the yen appears historically weak and may be ready for a reversal. A more aggressive BoJ could lead to a stronger yen, which might lower the USD/JPY pair. We should consider options strategies that could profit from a stronger yen in the coming weeks. Looking back, the period from 2022 to 2025 was marked by significant yen weakness due to the large interest rate gap between Japan and other major economies like the US. While the Federal Reserve began a modest easing cycle in 2025, the rate difference remains considerable. Even a small rate hike from the Bank of Japan could greatly narrow this gap and ignite a yen rally. This policy change also affects Japanese equities directly. A stronger yen reduces profits for Japan’s major exporters, while higher interest rates raise borrowing costs for all companies. Thus, we should expect challenges for the Nikkei 225 and think about using index futures or put options to protect against or profit from a potential downturn. Create your live VT Markets account and start trading now.

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