The Bank of Japan is likely to raise interest rates in December, moving from 0.5% to 0.75%. Governor Kazuo Ueda has mentioned that the bank will consider the “pros and cons” of this decision, hinting at a possible rate hike during the meeting on December 18-19. The USD/JPY pair has increased by 0.08% to 155.35. The Bank of Japan (BoJ) is the country’s central bank, focusing on achieving an inflation target of around 2%. Since 2013, it has followed an ultra-loose monetary policy, using Quantitative and Qualitative Easing to boost the economy.

Policy Changes

In 2016, the BoJ introduced negative interest rates, which weakened the Yen as it kept rates low while other central banks increased theirs. The difference in interest rates continued to widen in 2022 and 2023, further hurting the Yen’s value. However, rising inflation, driven by global energy prices and potential wage increases, has prompted the BoJ to change its strategy. In March 2024, the bank raised interest rates, moving away from its previous ultra-loose policy. A weaker Yen and inflation above the 2% target triggered this change. With the BoJ likely to hike rates to 0.75% at its December meeting, we anticipate increased market volatility. This follows the initial rate increase in January, which hinted at a more hawkish policy. Derivative traders should prepare for a notable market reaction in the next two weeks. Given the current USD/JPY rate of 155.35, a rate hike could significantly strengthen the Yen. We are looking into USD/JPY put options or JPY call options that expire in late December or January to benefit from a potential drop in the pair. This strategy helps manage risk while aiming to profit from the expected decline.

Market Expectations and Trading Approaches

The options market is already reflecting this anticipation, with one-month implied volatility on the Yen rising to over 11%. This indicates that the market expects a larger-than-normal move after the BoJ’s announcement. Traders should note that buying options is becoming more costly due to this elevated anticipation. The bank’s need to act is evident, as the core inflation rate for November 2025 was 2.8%. This figure has consistently stayed above the BoJ’s 2% target for more than a year, pressuring Governor Ueda to make firm decisions. This ongoing inflation strengthens the case for more stringent policy adjustments. Nonetheless, conflicting economic signals are present. Preliminary data for the third quarter of 2025 showed a 0.5% contraction in GDP. This economic slowdown could temper the BoJ’s forward guidance, even if they proceed with the rate hike in December. A potential “one-and-done” message could limit any long-term Yen appreciation. In the interest rate markets, we anticipate the 10-year Japanese Government Bond yield to rise following a rate increase. Traders can utilize interest rate swaps or sell JGB futures to position themselves for this increase. This approach reflects the end of the ultra-loose monetary policy that began in March 2024. For equity markets, a stronger Yen and higher borrowing costs may pose challenges for the Nikkei 225 index. We are considering purchasing Nikkei put options as a hedge against potential declines, especially in export-driven stocks that have benefited from a weaker currency. Market reactions are expected to be swift once the announcement is made. Create your live VT Markets account and start trading now.

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