Takuji Aida, an economic adviser to Japan’s Prime Minister, has recommended that the Bank of Japan (BoJ) should avoid raising interest rates in December. He believes that January would be a better time to consider rate hikes if economic growth is expected for fiscal 2026. The USD/JPY exchange rate rose 0.33% to 153.93, boosted by positive market sentiment.

Bank Of Japan’s Monetary Policy

The Bank of Japan, the country’s central bank, aims to maintain price stability with a target inflation rate of around 2%. Since 2013, it has followed an ultra-loose monetary policy, utilizing Quantitative and Qualitative Easing (QQE) to boost the economy. This strategy included introducing negative interest rates in 2016 and regulating 10-year government bond yields. In March 2024, the BoJ raised interest rates, signaling a shift from its previous approach. These policies resulted in a weaker Yen compared to other currencies, as other central banks raised rates to address high inflation. However, this trend began to reverse in 2024 when the BoJ stepped back from its ultra-loose policies. The need to change policy was driven by a weak Yen and rising global energy costs, which pushed inflation above the BoJ’s target. Increasing domestic wages also played a role in this decision. With discussions suggesting the BoJ might delay its next rate increase until January 2026, a December hike seems less likely. The market has already reacted, as the Yen has weakened and the USD/JPY has risen to 153.93. This change in expectations is crucial to consider in the coming weeks.

FX Derivatives Strategy

The cautious approach from policymakers appears justified by recent data. In October 2025, Japan’s core inflation cooled to 2.7%. Preliminary reports from autumn wage negotiations indicate smaller wage increases compared to earlier in the year. This provides the central bank a good reason to wait and gather more data before making any moves. For those trading FX derivatives, this suggests continued weakness for the Yen in the short term. It could be wise to explore call options on the USD/JPY set to expire in late December or early January, to take advantage of the widening interest rate gap. A “dovish hold” from the BoJ next month could provide a favorable boost for this strategy. We recall the significant policy change in March 2024 that ended eight years of negative interest rates, though the path to normalization has been slow. The current USD/JPY level is still below 160, a point at which we saw major government intervention in late 2024. This indicates there may be more potential for the pair to rise before authorities intervene. This scenario is also beneficial for Japanese stocks, as a weaker Yen enhances the overseas profits of major exporters. Therefore, we should consider call options or long futures positions on the Nikkei 225 index. The combination of a favorable exchange rate and low domestic borrowing costs could trigger a year-end rally. This strategy is further supported by the policy divergence with the United States, where the Federal Reserve has indicated that rates will remain high into 2026. At its last meeting, the Fed funds rate target held steady at 5.25-5.50%, giving the dollar a significant yield advantage. This overall situation supports a bullish outlook on USD/JPY and, by extension, Japanese stocks. Create your live VT Markets account and start trading now.

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