The Japanese Yen has slightly recovered from its lowest level since February, thanks to a strong US Dollar. Last week, Bank of Japan Governor Kazuo Ueda indicated that a rate hike could happen in December or January, which may help stabilize the Yen. However, there is uncertainty about when the next BoJ rate hike will take place. This is complicated by Japan’s new Prime Minister’s aggressive spending plans, which could hinder the Yen’s rise. The strong US Dollar benefits from the US Federal Reserve’s firm stance, which supports the USD/JPY exchange rate.

Uncertainty About BoJ Rate Hike

The Bank of Japan is cautious about increasing rates further because of the Prime Minister’s focus on stimulus. Recent data shows that Tokyo’s core Consumer Price Index is above the BoJ’s 2% target, which might justify tightening policies. Yet, potential currency interventions could help limit the Yen’s decline due to strong US Dollar support. The USD Index remains strong, buoyed by Fed Chair Jerome Powell’s remarks against rate cuts. The ongoing US government shutdown raises concerns about the economy, which might affect USD growth in the long term. Technically, the USD/JPY has broken through important barriers, suggesting it could continue to rise. Support may be around the 154.00 mark. The BoJ is moving away from very loose policies as the Yen falls, inflation rises, and wage growth appears in Japan.

US Dollar’s Strength Against The Yen

The US Dollar remains strong against the Yen, supported by a Federal Reserve that seems committed to its aggressive policies. The latest US Non-Farm Payroll data from October 2025 showed a strong labor market, adding 210,000 jobs, leaving the Fed with little reason to hint at rate cuts for December. This positive backdrop suggests that traders can expect continued strength in the USD/JPY pair. On the flip side, the Bank of Japan feels pressured to act as Japan’s national Core CPI for October was 2.9%, significantly above its target. Governor Ueda’s hints at a possible rate hike in the next two months are now taken more seriously. This creates a potential ceiling for the USD/JPY exchange rate and makes buying call options above 155.00 more risky in the coming weeks. We should also remember the sharp Yen rally that followed the Ministry of Finance’s direct intervention in late 2022 when the pair traded in a similar range. The possibility of similar actions now that we are above 154.00 means that holding long USD/JPY positions carries considerable risk. Traders may consider buying out-of-the-money JPY calls or USD/JPY puts as a hedge against any sudden policy changes. The Bank of Japan’s situation is further complicated by Prime Minister Takaichi’s pro-stimulus agenda. Her cabinet recently approved an extra budget of over ¥15 trillion. This spending could counteract monetary tightening, delaying a rate hike and keeping the Yen weaker. This policy divergence is a critical reason the pair has stayed high since the BoJ’s first major rate hike in March 2024. We’re also monitoring the US government shutdown, which has now lasted over a month with no end in sight. A prolonged shutdown could lead to weaker US economic data, potentially prompting the Fed to soften its aggressive stance. This is a significant risk that could limit further USD gains against all currencies, including the Yen. With the pair above the crucial 154.00 level, a test of 155.00 seems likely. However, due to the risk of intervention and the uncertain timeline from the BoJ, traders might explore options strategies like bull call spreads. This approach would allow participation in any upward movement toward 155.00 while minimizing potential losses if Japanese authorities decide to intervene. Create your live VT Markets account and start trading now.

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