The USD/JPY pair is trading just under 155.00 after Japan released its Q3 GDP numbers, which showed a smaller decline than expected. Japan’s Q3 GDP fell by 0.4% compared to the previous quarter, less than the anticipated 0.6% drop, following a 0.6% growth in Q2. The decline was mainly due to decreases in residential construction and exports. However, private domestic demand remained strong, with household spending rising by 0.1% and private non-residential investment growing by 1%. Market expectations for a December rate hike by the Bank of Japan (BOJ) have dropped, with the chance now at 30%, down from 50% last week. Still, the potential for policy tightening may increase due to fiscal measures planned by Prime Minister Takaichi, as a new economic package is expected to exceed last year’s ¥13.9 trillion supplementary budget. While the market is betting against a BOJ rate hike next month, we see signs that Japan’s economy is more robust than anticipated. The recent Q3 GDP figures showed a smaller contraction, and importantly, domestic spending and business investment are stable, indicating a solid economic foundation. We think the likelihood of a rate increase on December 19th is being underestimated, especially with the government’s plan for another large spending package. Japan’s latest Tokyo Core CPI for October 2025 was 2.9%, staying above the BOJ’s 2% target for over a year and a half. This ongoing inflation combined with fiscal stimulus puts pressure on the central bank to respond. As the swaps market currently shows only a 30% chance of a hike, there is a clear opportunity for traders. This low probability suggests that options are not fully accounting for the potential for a hawkish surprise from the BOJ. The current conditions allow for strategic positioning before any shifts in market sentiment. We see advantages in buying options that would benefit from a stronger yen, like USD/JPY put options that expire after the December meeting. These options are likely to be cheap due to the market’s dovish outlook. A BOJ move could cause the USD/JPY to drop sharply from its current level just below 155. The one-month implied volatility for the pair is about 8.5%, which appears low given the uncertainty surrounding the upcoming meeting. We remember how the BOJ surprised markets in December 2022 with a sudden policy change that sent the yen soaring. Buying straddles or strangles could be a smart way to trade the potential for a significant price move, regardless of the direction.

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