The Bank of Japan (BoJ) released its Summary of Opinions from the December monetary policy meeting. One member pointed out that the policy rate is deeply negative, even with recent hikes, and emphasized the importance of tracking economic effects. Another member supported consistent rate increases to mitigate potential risks. It was highlighted that Japan has the lowest real policy rate globally, and rate hikes could influence inflation through foreign exchange markets. A member cautioned that having real rates that diverge from equilibrium can disrupt resource allocation and economic growth. Government stimulus is expected to boost economic growth over the next year or two, and real wages might rise in the first half of next year. The Cabinet Office confirmed that the BoJ’s decisions aim for stable price targets, advising vigilance regarding capital spending and corporate profits.

Impact on USD/JPY Exchange Rate

Following the BoJ’s report, the USD/JPY fell by 0.28% to 156.06. The upcoming BoJ report, due on December 28, will include inflation and growth forecasts. Before the report, the USD/JPY showed little movement, with possible changes from the Fed influencing the US Dollar. Key support levels for USD/JPY include the December 26 low of 155.96, with possible drops to 155.44 from December 19, and 154.51 from December 17. The Bank of Japan’s December meeting summary reveals a clear shift toward a more hawkish stance, indicating additional interest rate hikes in 2026. The belief that the current policy rate is “far below neutral” strongly suggests that the BoJ plans to continue tightening monetary policies, marking a significant change from the very loose policies of the past leading into 2024. This view is supported by recent economic data showing Japan’s core inflation for November 2025 at 2.8%, above the bank’s 2% target. The outlook for the 2026 “Shunto” wage negotiations is encouraging, with early projections indicating pay increases could exceed 4%. This could boost consumer spending and allow the BoJ to act more decisively. The expected rise in real wages may finally provide the bank with the opportunity it has been waiting for.

Comparison with United States Monetary Policy

Japan’s policy direction contrasts with the United States, where the Federal Reserve has paused its tightening cycle, and markets are anticipating two rate cuts by mid-2026. This narrowing interest rate gap between the U.S. and Japan, which previously weakened the Yen, might soon reverse. We believe this difference in central bank policies will primarily drive downward pressure on the USD/JPY exchange rate. Given this outlook, it’s wise to consider positioning for a stronger Yen in the coming weeks. One straightforward strategy is to buy USD/JPY put options, which would benefit from a decline in the pair while limiting potential losses to the premium paid. As the BoJ’s policies become more active, we anticipate increased currency volatility, making such long-volatility positions potentially more effective. For those focused on generating income, selling out-of-the-money call spreads on USD/JPY is also appealing. This method profits from a declining or stable currency pair and leverages higher option premiums stemming from increased uncertainty. Aiming for a short strike price near the recent resistance level of 157.70 could offer a favorable balance of risk and reward. Create your live VT Markets account and start trading now.

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