The Japanese Yen (JPY) is gaining strength as expectations rise for the Bank of Japan (BoJ) to tighten its monetary policy. This shift follows Governor Ueda’s recent comments hinting at a more aggressive stance. As a result, the market is now predicting an interest rate increase in December, which impacts the USD/JPY exchange rate. The yen has appreciated by 0.4% against the USD, leading among the G10 currencies. This shows a clear market shift based on the new tightening expectations. The short-term rates market is now anticipating a 22 basis point hike for December 19, following Ueda’s remarks in parliament. Reports indicate that the government might support a BoJ rate increase.

USD/JPY Shows a Bearish Trend

USD/JPY is currently in a bearish trend, confirmed by the Relative Strength Index (RSI) dropping below the neutral 50 level. There is limited support for USD/JPY ahead of the 50-day moving average at 153.09. The yen is performing well among major currencies, which aligns with the Bank of Japan’s recent direction. The JPY shows sustained strength, with the USD/JPY pair trading near 135.50, a major change from the levels above 150 observed in previous years. This trend is driven by fundamental shifts in monetary policy over the past two years. Japan’s core CPI has consistently stayed above 2.3% for four straight quarters, leading the BoJ to raise its overnight call rate to 0.75%. Meanwhile, US inflation has cooled to 2.8%, allowing the Federal Reserve to lower its benchmark rate to 3.50%. This has narrowed the interest rate gap that previously favored the dollar. Looking back, hawkish comments from officials in late 2023 signaled a major reversal trend. The market began pricing in the first rate hike, which occurred in early 2024, paving the way for the yen’s long-term rise. Those early bearish signals in USD/JPY were crucial turning points.

Long Yen Positions Remain Attractive

For traders, it’s beneficial to hold long-yen positions. With the interest rate gap between the US and Japan likely to narrow further, strategies that profit from a continued decline in USD/JPY are appealing. Implied volatility on three-month options is at multi-year lows, making it cheaper to buy JPY calls or USD/JPY puts aimed at reaching the 130.00 level. The unwinding of the yen carry trade should speed up, adding further downward pressure on pairs like EUR/JPY and AUD/JPY. Traders might consider using futures to short these pairs, as the incentive to borrow in yen and invest elsewhere has greatly reduced. This broad shift away from using yen as a funding currency is likely to continue into 2026. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now