The Japanese Yen (JPY) has weakened as traders shift their focus from positive domestic data to the upcoming Bank of Japan (BoJ) meeting. This meeting is expected to bring a rate hike and a more aggressive stance on monetary policy. Despite strong trade and machinery order figures, the yen fell by 0.5% against the USD, underperforming all G10 currencies except the GBP. Market participants are preparing for the BoJ’s decision.

Expectations for the BoJ Meeting

Analysts predict a 25 basis point rate hike, and policymakers may support a higher rate path for 2026, along with a wider trading range for long-term yields. The key support level for USD/JPY is the 50-day moving average at 154.27, while near-term resistance is seen above 156.50. As the BoJ meeting approaches next week, the yen is weakening against the dollar, pushing USD/JPY towards 162.50. This decline occurs even though recent government data shows core inflation stubbornly above the 2% target, at 2.2% for November 2025. Traders seem more focused on the large interest rate gap than domestic economic conditions. A similar trend occurred in the last quarter of 2024 when the yen unexpectedly fell before a widely anticipated rate hike. At that time, the market fully expected a 25 basis point increase, but positioning and wider market trends dominated, driving USD/JPY above 156. This illustrates that reactions to a BoJ decision can be unexpected, especially when a hike is anticipated. The key difference now is the ongoing policy divergence with the United States, where the Federal Reserve’s funds rate remains at 4.5%. This keeps the yen carry trade attractive. This significant rate difference is heavily impacting the yen, which has declined over 4% against the dollar since September 2025. Leveraged funds have also increased their net short positions on the yen for the third straight week, suggesting they believe this trend will continue.

Market Volatility and Trading Strategies

For derivative traders, this sets up an intriguing scenario as the BoJ announcement approaches. One-week implied volatility for USD/JPY has risen to 11.5%, up from an average of 8% last month, indicating that the options market anticipates significant price movements. This suggests that strategies like long straddles, which can profit from large market shifts, may be worth considering. We’re monitoring near-term resistance for USD/JPY around the psychological level of 164.00, which hasn’t been tested since the late 1980s. Key support is currently at the 50-day moving average, near 160.75. A surprise decision or unexpectedly dovish guidance from the BoJ could lead to sharp movements beyond these levels. Create your live VT Markets account and start trading now.

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