Scotiabank analysts report a 0.2% increase in the Japanese Yen against the US Dollar.

    by VT Markets
    /
    Jul 15, 2025
    The Japanese Yen has risen by 0.2% against the US Dollar, showing strength compared to most G10 currencies. Investors are watching the upcoming US trade talks and President Trump’s comments about auto trade balances. Japan’s core machine orders came in above expectations, along with a positive report for the services industry index. This week’s trade and CPI data will significantly impact the Bank of Japan’s policy decisions set for July 31.

    Rising Bond Yields and Currency Movements

    Japanese Government Bond yields are increasing, impacting the USD/JPY currency pair, which may move closer to the lower end of the 142.50-148.00 range. This shift occurs as discussions about a possible rise in the Bank of Japan’s inflation forecast continue. We view the yen’s slight gain as a sign of bigger changes ahead, not just a temporary uptick. The upcoming Bank of Japan meeting is crucial. Positive data on machine orders and services are just the beginning; the real issue is the inflation that the central bank must now confront. The national core CPI, which the Bank closely monitors, has surpassed its 2% target for 15 months in a row, reaching 3.3% in June. Even more telling is the “core-core” inflation—excluding food and energy—which has reached a 42-year high of 4.2%. This isn’t just a short-term spike; it’s reinforced by recent spring wage negotiations, which secured an average pay rise of nearly 3.6%, the highest in three decades. The idea of “temporary” inflation is now obsolete.

    Implications for the Bond Market

    This inflation is creating pressure in the bond market. The yield on the 10-year Japanese Government Bond is pushing against the 0.5% limit set by the Bank’s Yield Curve Control policy. Any changes to that policy, which seem more likely, could lead to a surge in yields. This would make holding yen more attractive and undermine the long-standing carry trade that relies on cheap Japanese capital. For derivative traders, it’s time to be alert. The options market is already showing signs of change. Recently, one-month risk reversals on USD/JPY have shifted significantly, with traders now paying more for puts than calls. This indicates that the market is preparing for a steep decline. We believe it’s wise to place bets on this downside. Buying out-of-the-money USD/JPY puts can provide a strong opportunity if policy changes occur, while bearish put spreads can help reduce the entry cost for those cautious about rising implied volatility. Looking back to last December offers a clear example. When the Bank made an unexpected change to its yield band, USD/JPY dropped over 4% in just hours. The changes being discussed now are far more significant, and the market’s positioning is heavily in favor of dollar strength, suggesting any reversal could be just as severe, if not more so. Create your live VT Markets account and start trading now.

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