Japan’s Prime Minister, Sanae Takaichi, will soon give a speech outlining plans to increase defense spending to 2% of GDP by 2027-2028. In light of this news, the USD/JPY pair has dipped slightly, trading near 151.80. Meanwhile, the US Dollar Index is rising, suggesting the Japanese Yen is gaining some strength.

Currency Movements

A table displays the percentage changes in the Japanese Yen (JPY) against major currencies, highlighting that the yen is strongest against the British Pound today. The heat map makes it easy to compare the percentage changes between currencies. The base currency appears in the left column, while the quote currency is at the top, illustrating movements, including the JPY/USD changes. Author Sagar Dua has been involved with financial markets since college, where he earned a post-graduate degree in Commerce in 2014. A legal disclaimer notes the fast pace of markets and the forward-looking risks tied to the provided information, emphasizing the need for thorough research before making investment decisions. Japan’s new government is making a significant shift by ramping up defense spending. This move towards greater government spending is likely to increase inflation, affecting the dynamics of the Japanese Yen. We should consider the possibility that this increase in spending may lead the Bank of Japan to change its policies.

Impact on the Yen

This comes at a time when price pressures are already a concern. Japan’s core inflation has stayed above the central bank’s 2% target for over a year, with a reading of 2.5% in September 2025. The Bank of Japan has held its key interest rate at just 0.1%, resisting major policy changes. This new push for spending could trigger a significant policy response. Currently, USD/JPY is trading around 151.80, close to highs seen in 2022 and 2023 that led to previous currency interventions. This new domestic factor may provide a solid reason for a sustained increase in the Yen’s value. Therefore, investing in Yen strength seems more attractive now than it has been in recent years. In the coming weeks, consider buying put options on the USD/JPY pair. This strategy allows us to prepare for a decrease in the exchange rate and a stronger Yen, while limiting our potential losses to the premium paid. It’s a smart way to trade during this uncertain policy environment. The increased bond issuance needed to support this spending will likely put upward pressure on Japanese government bond yields. The clash between fiscal and monetary policies could increase currency volatility. Therefore, purchasing JPY call options or positioning for volatility may also yield good returns. Create your live VT Markets account and start trading now.

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