The Impact Of BoJ And Fed Policies

In December, the Bank of Japan (BoJ) raised its benchmark rate to 0.75%, the highest in 30 years. However, they haven’t outlined a clear plan for future changes. Many market participants are doubtful and expect low inflation to continue into 2026. The capture of Venezuelan President Nicolás Maduro by US forces and ongoing geopolitical tensions in Russia, Ukraine, and Iran are strengthening the USD. This is happening even as some speculate possible Fed rate cuts in March. According to technical analysis, the USD/JPY pair is still on an upward trend. It is supported by the 200-period Simple Moving Average (SMA) at 156.04, and there are no signs of it being overbought. However, uncertainty around interventions and dovish Fed expectations may limit aggressive bearish positions on the JPY. Traders are watching the upcoming US economic indicators closely, as these may hint at the Fed’s future rate decisions. The gap between the Federal Reserve, which might cut rates, and the Bank of Japan, which isn’t ready to tighten, is causing tension. With the USD/JPY above 157, we find ourselves in a challenging situation where the economic factors are opposing each other. This scenario suggests that simply buying the dollar against the yen could be a risky move in the near future. The argument for a weaker dollar is getting stronger, especially after the US ISM Manufacturing PMI for December 2025 showed a contraction at 48.5, below expectations. This figure supports the belief that the Fed may start cutting interest rates as early as March. If US yields drop, it could limit any significant gains in the USD/JPY pair.

Challenges And Opportunities In Trading

The Bank of Japan’s rate hike to 0.75% in December 2025 marked a beginning, but the market is calling for more clarity. Recent data indicates the BoJ may need to act sooner, as Japan’s core inflation remains steady at 2.8%. Additionally, early reports are showing unions aiming for wage increases of over 5% in the upcoming spring negotiations. These factors strengthen the argument for another rate hike in the first half of this year. We also need to consider Japan’s history with currency intervention, especially during the significant operations in 2022 and 2024 when the yen fell sharply. The Ministry of Finance has previously spent over ¥9 trillion in a single year to support its currency. Traders are now especially alert for sudden yen appreciation due to official action. Geopolitical uncertainties, including the recent capture of Venezuela’s president, are benefiting the dollar. This demand for a safe haven is a key reason the dollar has remained strong despite weak economic data. It currently serves as a support level for the USD/JPY, balancing the potential Fed rate cuts. For traders, this situation signals increased volatility rather than a clear trend. Speculators are holding extreme net short positions against the yen, similar to late 2023 levels, creating the risk of a sudden short squeeze if the BoJ makes an unexpected announcement or intervention. Options strategies that take advantage of large price movements in either direction, like buying straddles, may be more effective than simply taking a long or short position on the currency pair. Create your live VT Markets account and start trading now.

<Click here to set up a live account on VT Markets now