Japan’s Prime Minister Sanae Takaichi mentioned that the national debt is still high. There is a chance to decrease the issuance of new bonds for the fiscal year 2026 budget. The Bank of Japan raised interest rates to consistently reach a 2% inflation target. This move led to a 0.59% drop in the USD/JPY rate, now at 156.07.

Factors Affecting The Japanese Yen

The Japanese Yen is shaped by various influences, such as the Bank of Japan’s policies and the differences in bond yields between Japan and the US. The Bank’s very loose monetary policy from 2013 to 2024 caused the Yen to lose value against other major currencies. The differing approaches between the US Federal Reserve and the Bank of Japan widened the bond yield gap. Recent changes in monetary policies are helping to close this gap, which affects the Yen compared to the US Dollar. Risk sentiment also impacts the Yen’s value since it is seen as a safe-haven investment. During financial crises, investors are more likely to turn to the Yen because of its stability compared to riskier currencies. The remarks about Japan’s national debt and possible reductions in bond issuance highlight a shift towards tighter policies. This commitment to fiscal responsibility, along with recent central bank actions, signals a strengthening Yen. We anticipate a continued decline in the USD/JPY pair through the holiday season and into the new year.

Market Strategies and Trends

The Bank of Japan’s interest rate hike is now seen as essential for managing stubborn inflation. The core CPI for November 2025 remained at 2.8%, staying above the BoJ’s 2% target for six consecutive months. This ongoing price pressure indicates that further policy normalization is likely in the first quarter of 2026, which will support the Yen. Fiscal discipline is tightening conditions just as the yield on 10-year Japanese Government Bonds has reached 1.15%, the highest in years. In contrast, the US 10-year Treasury yield has softened to 3.95%, as the market anticipates the Federal Reserve easing in 2026. The interest rate gap that widened dramatically from 2022 to 2024 is now reversing, weakening a key support for the US Dollar against the Yen. In the upcoming weeks, derivative strategies should target the declining trend in USD/JPY. Purchasing put options allows for profit from falling prices while managing risk, and implied volatility may be lower during the quiet holiday trading period. Another strategy is to sell out-of-the-money call spreads, allowing for premium collection while betting that future upside is limited. It’s also worth noting that while the trend is shifting, the market isn’t overly crowded with this trade. Recent reports from large speculators show they have significantly decreased their net short positions on the JPY but have not yet established a major net long position. This indicates that there is still plenty of opportunity for more investments to flow into the Yen as this policy becomes the market norm. Create your live VT Markets account and start trading now.

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