The coming week is very important for Japan and the Japanese Yen (JPY). Prime Minister Takaichi will meet President Trump for the first time, and the Bank of Japan (BoJ) will hold a policy meeting on October 30. This meeting might bring changes to interest rates. Currently, market predictions point to a 20 basis points (bps) rate hike over the next three months, but there is doubt about a 25 bps increase by the end of the year. So far this month, the JPY has dropped over 3% against the USD, making it the worst-performing currency among the G10 in October. If the BoJ can raise rates by year-end, the JPY might regain some strength against the USD. This expectation relies on BoJ Governor Ueda reinforcing a tough stance during the policy meeting.

Japanese Real Rates Are Very Low

Japanese real rates are still very low. During his press conference, Governor Ueda might indicate the BoJ’s careful approach to normalizing policies. Selling USD/JPY during rallies before the BoJ meeting could be a good strategy, especially since there is resistance near the recent high of USD/JPY 153.27. The FXStreet Insights Team has provided these market observations, bringing together insight from leading experts along with both internal and external analyst comments. The meeting between Prime Minister Takaichi and President Trump, along with the Bank of Japan’s announcement, makes this a key week for the yen. These events are likely to create significant market movements, offering opportunities for traders. We are prepared for a possible shift in the yen’s recent decline. Currently, market pricing shows little faith in a BoJ rate hike by the year-end, which has contributed to the yen’s drop of over 3% against the dollar this month. The yen is struggling as major currencies slide, reflecting a general belief that policies will remain loose. However, this overall pessimism might be exaggerated. We believe that during this week’s press conference, Governor Ueda will indicate a more hawkish position, paving the way for a rate hike early next year. This belief is supported by Japan’s core inflation, which has been above the BoJ’s 2% target for over two years. This contrasts with the policy outlook after the BoJ ended negative interest rates in March 2024, which many now see as just the first step.

Interest Rate Gap Between Japan and the U.S.

The large interest rate gap between Japan and the United States, where the Fed funds rate exceeds 5%, is a key factor in the yen’s weakness. A hawkish signal from the BoJ would be the first step towards closing this gap and could lead to a significant reversal in the USD/JPY pair. We anticipate the pair moving towards 147 over the next three months. For traders in derivatives, this outlook suggests buying JPY call options or USD put options to bet on a stronger yen. A defined-risk strategy, like a USD/JPY bear put spread, could effectively take advantage of a potential downturn after the BoJ meeting. This strategy allows traders to profit from a drop in the pair while limiting potential losses. We recommend entering these positions by selling into any rallies in USD/JPY, especially as it nears the recent high around 153.27. This level is significant resistance and reminds us of the highs from late 2023 and 2024 that led to official warnings about currency intervention. Thus, it could be a good point to start bearish positions. Create your live VT Markets account and start trading now.

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