Japan’s Chief Cabinet Secretary, Minoru Kihara, announced that the government expects the Bank of Japan (BoJ) to implement suitable monetary policies to achieve stable inflation targets. He stressed that wage increases should drive inflation, not rising costs. On the currency side, the USD/JPY dropped by 0.5% to around 155.30 during Monday’s European session. This drop followed hawkish remarks from BoJ Governor Kazuo Ueda. The currency is under pressure as markets react to the BoJ’s monetary policies.

Bank Of Japan’s Inflation Target

The Bank of Japan, the nation’s central bank, aims to keep price stability with an inflation target of about 2%. Since 2013, the BoJ has pursued a very loose monetary policy using Quantitative and Qualitative Easing to encourage economic growth and inflation. These policies have led to a weaker yen, worsened by differing international monetary policies and rising inflation. In 2024, the BoJ raised interest rates, moving away from its earlier strategy. This decision was driven by a weaker yen, increasing global energy costs, and anticipated salary hikes in Japan, pushing domestic inflation above the target. Today’s comments from the government clearly indicate they want the Bank of Japan to act faster on normalizing policy. This increases the chances of another interest rate hike to keep inflation, driven by wage growth, close to the 2% target. There’s a good chance the BoJ will take action again, possibly in the first quarter of 2026. With USD/JPY already falling toward 155.30, the trend is likely downward for this currency pair. This situation resembles the warnings before direct currency interventions during the yen’s historical weakness in 2022 and 2024. Traders might consider buying Japanese Yen call options for early 2026 to take advantage of potential yen strength.

Monetary Policy Changes And Their Impact

The Bank of Japan’s policy rate has only reached 0.25% since it shifted away from negative rates in March 2024. With core inflation steady at 2.6% for the last quarter and today’s political pressure, an increase to 0.50% now seems likely. Selling Japanese Government Bond (JGB) futures is a straightforward way to prepare for rising yields that would follow a rate hike. A stronger yen could be a challenge for Japan’s export-driven Nikkei 225 index. While the 2025 “Shunto” wage negotiations resulted in an average pay increase of 4.2%, boosting domestic demand, a rapidly strengthening currency could hurt the overseas profits of major companies. We believe that buying Nikkei 225 put options is a smart move to protect against or speculate on a possible stock market decline. Create your live VT Markets account and start trading now.

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