USD/JPY dropped to around 155.25 early Monday in Asia, as the US Dollar weakened against the Japanese Yen. This comes as anticipation grows for a Federal Reserve meeting this week, where a 25 basis point interest rate cut is expected. The CME FedWatch tool suggests there’s almost a 90% chance of a rate cut at the December meeting. The potential appointment of Kevin Hassett as Fed Chair could also play a role, as he is favored for pushing for more cuts. President Donald Trump is expected to announce his decision in early 2024. Japan has accused Chinese jets of targeting its F-15 aircraft with fire-control radar over international waters near Okinawa, calling these actions unsafe. Defence Minister Shinjiro Koizumi pledged to respond firmly yet responsibly to maintain regional stability. The Japanese Yen is influenced by the Bank of Japan’s (BoJ) policies, economic performance, bond yield spreads, and market sentiment. The BoJ’s previous ultra-loose monetary policy is shifting towards tightening, which affects the Yen’s value. During times of market stress, the Yen is viewed as a safe-haven currency, boosting its appeal and strength in turbulent conditions. With a strong chance of a Federal Reserve rate cut next week, the US dollar is expected to weaken. Recent US jobs data for November 2025 showed a slowdown, with non-farm payrolls falling short of expectations, and recent CPI figures have eased. This gives the Fed a clear path to adjust its policies. Given the nearly 90% probability of a 25 basis point cut, it makes sense to expect further declines in the dollar against the Yen. This anticipated difference in policies is narrowing the gap between US and Japanese government bonds, significantly impacting this currency pair. The yield difference between the 10-year US Treasury and its Japanese equivalent has decreased by over 30 basis points in the past month, and we expect this trend to continue. Derivative traders should watch out, as implied volatility on one-month USD/JPY options has jumped above 11%, indicating the market is prepping for a big move after the Fed’s announcement. Growing military tensions between Japan and China further strengthen the Yen. As a safe-haven currency, the Yen tends to gain during regional instability and geopolitical risks. The incident near Okinawa is prompting investors to seek safety, providing additional support for the Yen that is separate from monetary policy actions. This situation highlights the significant policy changes since the BoJ began normalizing its approach in 2024. This shift, combined with the expected start of the Fed’s easing cycle, represents a long-term challenge for the USD/JPY pair. The likely selection of a more dovish Fed Chair next year reinforces the belief that the path ahead for the USD/JPY will likely be downward.

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