Japan’s Prime Minister, Sanae Takaichi, said that Japan has not yet reached the Bank of Japan’s (BoJ) price target. She believes the BoJ should keep working with the government to set the right monetary policy and sustainably achieve this target.
Abenomics has helped increase GDP and create jobs. The government plans to use fiscal spending wisely to boost household income and consumer confidence. Right now, the USD/JPY exchange rate is down 0.14% at 154.00.
The Japanese Yen (JPY) is one of the most traded currencies in the world, affected by Japan’s economic performance and BoJ policies. An ultra-loose monetary policy from the BoJ from 2013 to 2024 led to a weaker Yen. However, a planned policy change by the BoJ in 2024 is starting to support the Yen.
The difference in bond yields between Japan and the US also affects the Yen’s value. The BoJ’s past approaches differed from other central banks, leading to a wider yield gap and benefiting the US Dollar. Recent policy changes by the BoJ and rate cuts by other banks are helping to close this gap.
The Yen is often seen as a safe-haven currency, which tends to increase in value during market stress.
With the government indicating that Japan is only halfway to meeting its inflation target, it seems the Bank of Japan will need to keep a cautious monetary policy. This suggests that any future interest rate hikes will be gradual and clearly communicated. The main driver for a weak Yen—interest rate differences—looks set to continue.
The latest core Consumer Price Index (CPI) data from October 2025 shows a rate of 1.6%, still below the BoJ’s 2% target, reinforcing this view. The BoJ ended its negative interest rate policy in March 2024 but has only raised rates once since then, to 0.10%. This slow approach contrasts with the US Federal Reserve, which is maintaining its key interest rate between 4.00% and 4.25%, giving a significant advantage to the dollar.
For derivative traders, this situation suggests it could be beneficial to position for ongoing Yen weakness or at least a lack of Yen strength. One strategy is to sell out-of-the-money JPY call options against the dollar, allowing traders to collect premiums based on the expectation that the USD/JPY pair won’t drop significantly in the upcoming weeks.
However, we should be cautious of the risk of government intervention since the pair is trading at high levels around 154.00. In 2022 and again in 2024, Japanese authorities stepped in to support the Yen as the exchange rate approached 160. Thus, buying long-dated USD/JPY call options could be a calculated way to bet on further Yen depreciation while keeping our maximum risk defined.
The government’s focus on fiscal spending to enhance household income is a longer-term strategy that won’t impact currency markets right away. The difference in policies between a cautious Bank of Japan and a determined Federal Reserve will continue to be the central theme. This outlook strengthens the idea that carry trades, where traders borrow in Yen to invest in higher-yielding currencies, will remain popular.
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