External Factors Influencing JPY

The Japanese Yen (JPY) has grown by 0.4% against the US Dollar (USD), even though it is still weaker compared to other G10 currencies as the USD weakens overall. The recent rise in JPY is mainly caused by changes in external conditions and lowered expectations for the Federal Reserve’s interest rates. These factors lead to narrower yield spreads, which support the JPY. Markets are watching important upcoming GDP and industrial production data from Japan. However, the recent movements are driven largely by external factors. For USD/JPY, we expect a bearish trend, aiming for a break below the mid-146 to mid-148 range that has defined price movements since early August. The information here looks ahead and carries risks and uncertainties. It is for informational purposes only and should not be seen as advice for buying or selling any assets. Always conduct thorough research before making investment decisions, as investing can result in a total loss of principal and other impacts. The author is not responsible for any errors, omissions, or inaccuracies in this information. This is not personalized advice, and the author takes no responsibility for damages from the use of this information. Neither the author nor the platform are registered investment advisors. Given the current environment, we see the US dollar weakening against the Japanese yen due to changing expectations about US interest rates. This shift is reducing the yield spread between US and Japanese government bonds, driving the yen’s recent strength. We believe this trend could continue in the short term. Recent US inflation data from July 2025 shows the Consumer Price Index cooling to 2.8%. This encourages the market to believe that the Federal Reserve may keep interest rates steady, which has caused the US 10-year Treasury yield to fall below 3.9%. These external factors are now more impactful for the yen than Japan’s domestic economy.

Domestic Outlook and Derivative Strategies

On the Japanese side, preliminary data for second-quarter 2025 GDP indicates a slight expansion of 0.5%, slightly better than what the market expected. Although this alone is not a major catalyst, it provides support for the yen, easing potential challenges and allowing traders to concentrate on the larger issue of US dollar weakness. Given the bearish outlook for the USD/JPY pair, we should explore derivative strategies that benefit from a decrease in the coming weeks. This could mean buying USD put options or JPY call options with strike prices below 146.00. We aim for expirations in late September or early October 2025 to allow time for the trade to develop. We must also be mindful of the risk that this trend could change. The mid-146 to mid-148 range has been a strong support level since early August. If the price breaks decisively above 148.50, it could suggest that our bearish view is incorrect, requiring us to reassess our positions. Looking back, we see historical parallels. In late 2023, a rapid change in market sentiment about Fed policy caused the USD/JPY to drop significantly from its cycle highs. The current situation feels similar, indicating a chance for a quick decline if the 146 support level does not hold. Create your live VT Markets account and start trading now.

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