The Japanese Yen is under pressure, prompting local business leaders to worry that its extreme weakness could harm profits and wage growth. Ken Kobayashi, the chairman of the Japan Chamber of Commerce and Industry, has urged the government to take stronger actions regarding foreign exchange policy, hinting at possible intervention. Kobayashi described the yen as “excessively weak” and suggested that a more suitable exchange rate would be around ¥130 to the dollar, based on feedback from corporate surveys.

Market Reality vs. Corporate Desires

Currently, the US dollar is trading at about ¥162.50, leading to more alarm within Japan about the yen’s weakness. This situation indicates that local businesses are nearing a breaking point, making official action more likely. The push for a more favorable rate near ¥130 underscores the significant difference between what businesses want and the current market situation. The chance of currency intervention by the Ministry of Finance is now very high, which should be the main concern for traders. In late 2024, when the yen weakened past ¥160, authorities intervened and spent a substantial amount to support it. With the yen even weaker now, traders should be ready for sudden moves to strengthen it. This issue is aggravated by the contrasting strategies of central banks. The Bank of Japan has recently moved away from negative rates and has taken small steps to raise them throughout 2025 but is still close to zero. Meanwhile, US inflation remains stubborn, finishing last year at 3.1%. This has made the Federal Reserve cautious about lowering rates further, keeping a large gap between US and Japanese interest rates. For derivative traders, high implied volatility on USD/JPY options is expected. The risk of a sudden change of 5-10 yen in a single day due to intervention suggests that buying volatility is a wise choice. Strategies like long straddles could profit from significant movements in either direction, although the immediate risk leans towards a stronger yen.

Risk Management Strategies

Given the high likelihood of intervention, traders with long USD/JPY positions should think about protecting against potential losses. Buying USD/JPY put options can help guard against a sudden rise in the yen. These options serve as a form of insurance if the Ministry of Finance acts. On the other hand, borrowing inexpensive yen to invest in higher-yielding US assets remains profitable, as long as no intervention occurs. Japan’s core inflation was 2.1% in the last quarter of 2025, which isn’t high enough to push the Bank of Japan into drastic rate hikes. This means that, unless direct action is taken, the underlying pressure on the yen is likely to continue. Create your live VT Markets account and start trading now.

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