The US Treasury Secretary commented on Federal Reserve rates and offered advice to the Bank of Japan (BoJ), indicating that the BoJ might be slow to address inflation. This has raised concerns about the weaker value of the Japanese yen (JPY) compared to the US dollar (USD). A new trade agreement between the US and Japan includes a 15% baseline tariff on Japanese exports, which may reduce US criticism of Japan’s trade practices. However, Japan’s finance ministry may prefer to steer clear of more scrutiny from US officials.

BoJ and Tariff Effects

The BoJ will assess how US tariffs impact the Japanese economy, as market rates haven’t fully adjusted to a possible 25-basis point increase expected in six months. Even though the JPY had a brief rally, the forecast for USD/JPY remains at 145 in three months, based on ongoing speculation about rate hikes. The key takeaway is that there is a growing policy gap between the US and Japan. Recent US inflation data for July 2025 showed a steady 3.5%, indicating that the Federal Reserve is unlikely to cut rates soon. In contrast, the BoJ seems to be lagging in addressing its own inflation issues. The new 15% tariff on Japanese exports to the US presents challenges for Japan’s economy. Preliminary export figures for July 2025 already showed a 4% drop in shipments to the US, significantly affecting the auto industry. These economic pressures make it less likely for Japan’s finance ministry to take steps to boost the yen since that would hurt exporters even more. This situation mirrors the period from 2022 to 2024, when differing interest rate policies led to a significant decline of the yen against the dollar. The reasons for a stronger dollar and a weaker yen are once again clearly visible. We think the USD/JPY pair is likely to move upwards.

Trading Strategy for USD/JPY

In light of this situation, we advise traders to consider buying USD/JPY call options that expire in the next three to four months. With the current trading price around 141.50, aiming for strike prices of 143 or 144 presents a cost-effective way to prepare for a rise towards the 145 target. This approach offers an opportunity for gains while capping your maximum risk to the premium paid. The main risk to this outlook is an unexpected shift towards a more aggressive policy from the Bank of Japan. The market isn’t fully factoring in a 25-basis point rate hike in the upcoming six months, so any remarks hinting at a quicker pace could cause a rapid, though likely brief, strengthening of the yen. Therefore, it’s important to manage position sizes carefully. Create your live VT Markets account and start trading now.

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