Japan’s finance minister, Mr. Kato, said that monetary policy is managed by the Bank of Japan (BOJ). He expects the BOJ to implement the right monetary strategies to meet its price targets consistently and in harmony with the government. Mr. Kato chose not to respond to comments from US Treasury Secretary Scott Bessent, who recently criticized the BOJ and suggested it should raise interest rates.

Resisting Foreign Pressure

These comments indicate that the Bank of Japan plans to resist outside pressure to raise interest rates right away. We believe this is an official effort to shape market expectations before the next policy meeting, which may result in ongoing weakness of the yen as long as the BOJ sticks to its own schedule. The significant gap in interest rates is the main factor for currency traders. The US Federal Reserve’s rate is fixed at 5.25%, while the BOJ’s rate sits at only 0.10%. This creates a strong incentive to sell the yen and buy higher-yielding dollars. Currently, the USD/JPY exchange rate is close to 165, a level that has often raised alarms in the past. Recent data supports the BOJ’s cautious approach, which we think they will continue. Japan’s core Consumer Price Index for July 2025 showed a slight drop to 2.1%, down from 2.3% in June. This data suggests that inflation is stabilizing around the 2% target, meaning there’s less urgency for a rate hike. Due to this uncertainty, there is a rising interest in options on the yen. Traders are buying USD/JPY straddles, which will profit from significant price movements in either direction, set to expire in late September. This is in response to the expected volatility around the BOJ’s next meeting.

Currency Interventions

We should also consider past events, particularly the Ministry of Finance’s currency interventions in 2022 and 2024 when the yen was similarly weak. Because of this, some traders are purchasing inexpensive, out-of-the-money JPY call options. These options act like low-cost lottery tickets, potentially paying off big if the government decides to strengthen the yen. The difference in policies also affects equity derivatives. A weak yen usually increases profits for Japanese exporters. The Nikkei 225 index has risen over 15% so far in 2025. Traders are using Nikkei futures to bet that the BOJ’s ongoing inaction will keep stock prices high in the coming weeks. Create your live VT Markets account and start trading now.

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