The Japanese Yen (JPY) dropped 0.3% against the US Dollar (USD), underperforming most G10 currencies. This came after Bank of Japan (BoJ) Governor Ueda made hawkish comments, shifting market focus from a likely December rate hike to Japan’s longer-term monetary strategy, particularly regarding rising government bond yields. Despite the hawkish stance from Governor Ueda, the BoJ is still a key player, but market interest has moved to future expectations. A 25 basis points rate hike in December is widely expected. There are also worries as Japanese government bond yields hit new highs not seen in decades, reminiscent of past volatility that affected the BoJ’s earlier decisions.

Yen Weakens Against The Dollar

The yen is weakening against the dollar, despite the BoJ hinting at tighter policy. The market has priced in a December rate hike due to Japan’s stubbornly high core inflation, which reached 2.8% in October. This suggests that the upcoming BoJ decision may not significantly influence the market. Our focus should shift to the Japanese Government Bond market, where rising yields are raising alarms. The 10-year JGB yield has reached 1.25% for the first time since 2011, sparking fears of renewed market instability. We recall the turbulence that caused the BoJ to pause its normalization plans earlier this year. Given these concerns, a key strategy for the coming weeks is to prepare for higher volatility in the USD/JPY pair. Implied volatility on one-month options is starting to rise, indicating that the market is anticipating significant changes after the meeting. Buying options like straddles or strangles could be a smart way to profit from sharp price movements in either direction.

Policy Divergence Between Central Banks

For traders with a directional view, the growing gap between BoJ policy and that of the US Federal Reserve is important. While the BoJ is just starting its rate hikes, the Fed has kept rates steady around 3.50% for several months. This shift could eventually benefit the yen, but the timing is still unclear. Right now, the focus isn’t just on the expected 25 basis point hike this month. We should pay close attention to Governor Ueda’s guidance on future plans and any changes to the BoJ’s bond-buying strategy. Any hints about the pace of upcoming hikes will shape the yen’s path into early 2026. Create your live VT Markets account and start trading now.

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