The Japanese Yen is holding strong during the European trading session, supported by expectations of a stricter Bank of Japan. Governor Kazuo Ueda’s recent comments and improved business confidence suggest a possible interest rate hike, despite financial concerns linked to Prime Minister Sanae Takaichi’s spending plan. The US Dollar is close to a two-month low, as forecasts indicate potential Federal Reserve rate cuts. This is the opposite of what may happen in Japan, which boosts the outlook for the Yen. The Bank of Japan’s Tankan survey reveals that the business confidence index rose to 15 in Q4 2025, up from 14 in the last quarter. The manufacturing outlook also improved, increasing from 12 to 15.

Progress Toward Inflation Goals

Kazuo Ueda reports that Japan is making progress toward its inflation target, hinting at a rate hike during the December policy meeting. However, traders are cautious and waiting for more details on policy changes. Takaichi’s spending plan raises worries about public finances, which could limit the Yen’s gains. Technical analysis shows that USD/JPY is having trouble exceeding the 100-hour simple moving average (SMA), with support found around the 155.00 mark. If it moves past 156.00, it may trigger short-covering, potentially pushing the pair towards 157.00. The Bank of Japan’s decisions on interest rates reflect its economic outlook, affecting how strong or weak the Yen will be. There’s a clear divide between the Bank of Japan, which seems poised to raise rates, and a Federal Reserve expected to continue cutting rates. Japan’s core consumer price index (CPI), at 2.7% for November, has been above the BoJ’s 2% target for over two years, providing justification for action. This split is currently the biggest factor influencing the Yen. On the other hand, the US dollar is facing pressure as markets are anticipating two more Fed rate cuts in 2026. This outlook is backed by recent data showing core inflation cooling to a two-year low of 3.1%. The upcoming US jobs and inflation reports this week are vital; any signs of an economic slowdown will strengthen the case for a weaker dollar.

Positioning for a Stronger Yen

This suggests a lower USD/JPY, and we should consider positioning ourselves for this movement ahead of the BoJ meeting on December 19th. One strategy is to buy put options on USD/JPY at around the 155.00 support level, allowing us to profit from a stronger Yen while keeping our maximum risk clear. With implied volatility high before the central bank’s announcement, outright buying options can get pricey. A more economical approach could be a bearish put spread—like buying a 155 put and selling a 153 put—aimed at breaking recent lows. This reduces initial costs but limits potential profits. We must remember that Japanese officials have reacted strongly to a weak Yen in the past, conducting currency interventions in 2022 and 2024 when rates were around these high-150s. Raising rates now would help combat inflation and bolster the currency. The Tankan survey showing improved business confidence gives the BoJ the justification it needs to tighten policies further. However, caution is needed, as the market has already priced in a hawkish BoJ stance. Any sign of hesitation from Governor Ueda on Friday could cause a quick reversal, pushing USD/JPY back toward the 157.00 mark. Thus, using options to manage risk is smarter than taking a direct short position in the spot market. Create your live VT Markets account and start trading now.

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