Japan’s economy minister, Minoru Kiuchi, stressed the importance of quickly passing the 2026 fiscal budget in parliament. He assured that the government aims for responsible fiscal policy without reckless spending. Market movements are influenced by various factors, including foreign exchange rates and long-term interest rates, not just fiscal policy. To prevent a return to deflation, sustaining wage growth will be essential. Japan has yet to fully emerge from deflation.

The Impact of Currency Interventions

At the time of writing, the USD/JPY rate rose by 0.45%, reaching 158.90. The Japanese Yen is affected by the Bank of Japan’s policies and the differences in bond yields with the US. The Bank of Japan often intervenes in currency markets to lower the Yen’s value for economic reasons. The shift away from ultra-loose monetary policy by the Bank of Japan has begun to help the Yen. Historically, the difference in bond yields between Japan and the US has affected the Yen. Recent policies have narrowed this gap. During market stress, the Yen is seen as a safe-haven investment, attracting more funds.

The Outlook for Yen Traders

The government’s cautious approach emphasizes fiscal discipline while tackling the risk of deflation. As of January 13, 2026, officials have not declared victory over falling prices, indicating that the Bank of Japan will likely be slow to raise interest rates. This stance supports the ongoing weakness of the Yen. This policy keeps a significant interest rate gap between the US and Japan. Currently, the US 10-year Treasury yield is near 3.8%, while the Japanese 10-year government bond struggles to stay above 1.2%. This difference heavily favors the dollar and will continue to pressure the Yen until a significant change occurs from the Bank of Japan. For traders, this environment suggests that betting on Yen strength in the short term is risky. With USD/JPY nearing 158.90, derivative plays that benefit from the pair staying high or moving toward 160 seem attractive. This could involve purchasing near-term USD/JPY call options or structuring call spreads to reduce costs. However, we must remember what happened in late 2024 when the currency pair crossed the 160 mark, prompting direct market intervention from the Ministry of Finance. The likelihood of a quick reversal by officials is now much higher, making it risky to sell the Yen outright. With the potential for continued Yen weakness and the chance of sudden government intervention, volatility is the most certain trade. Implied volatility on Yen options has risen to a six-month high of 12.5%, indicating that the market anticipates significant movements. Strategies such as buying straddles or strangles, which profit from large price swings in either direction, should be considered in the coming weeks. The minister’s focus on sustainable wage growth highlights the upcoming catalyst. We will closely monitor the preliminary results of the “Shunto” spring wage negotiations, expected in mid-February, for signs of strength. If there are another year of wage gains below inflation, like in 2025, the Bank of Japan will have strong reasons to maintain its cautious approach. Create your live VT Markets account and start trading now.

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