The Japanese Yen (JPY) has risen by 0.6% against the US Dollar (USD), outperforming all other G10 currencies. This change follows comments from BoJ Governor Ueda, which were seen as a hint at tightening monetary policy.

Market Expectations

Market predictions for the BoJ’s December meeting now include a potential 21 basis point rate increase, compared to single-digit forecasts just a week ago. The gap between 2-year US and Japan yields has narrowed, which supports the yen. The BoJ’s next meeting is on December 19. With the Bank of Japan hinting at possible policy changes, we’re observing a significant shift in risk. One-month implied volatility in USD/JPY has jumped to over 15%, a level not seen since the market volatility of early 2023. Traders might consider buying volatility through strategies like straddles, as the outcome of the December 19 meeting could lead to a sharp price movement in either direction. As the market anticipates a likely rate hike, many are focusing on positioning for further JPY strength. Buying JPY call options or USD put options that expire in late December or January can help investors benefit from a hawkish BoJ decision. This approach offers a chance for profit if the yen continues to strengthen, while limiting the risk to the premium paid. The biggest risk we see is a sudden unwind of the yen carry trade, a strategy popular for years. Data from late November 2025 showed that speculative short positions against the JPY were at near multi-year highs. A confirmed rate hike could lead to a massive short squeeze, quickly driving up the yen as traders close their positions.

Narrowing Yield Spread

The narrowing gap in the 2-year US-Japan yield is a key support for this movement. This spread has compressed by over 30 basis points in the last two weeks, lowering the dollar’s yield advantage. Derivative traders can take advantage of this situation through interest rate swaps, aiming to benefit from rising short-term Japanese rates. It’s important to note that the BoJ has not engaged in significant rate hikes since 2007, well before the global financial crisis. This long period of very loose policy means the market may not be ready for a lasting tightening phase. Any actions taken on December 19th will likely have a bigger impact than rate changes from other central banks. Create your live VT Markets account and start trading now.

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