Taro Kono, a member of Japan’s ruling party, has been calling for higher Bank of Japan (BoJ) rates since mid-2024. At a recent conference, he stressed that raising rates is essential to strengthen the yen. Kono highlighted the problems caused by the weak yen against the dollar, including its impact on inflation and domestic prices. When he first pushed for higher rates in July 2024, the USD/JPY exchange rate was around 158.

Renewed Calls For A Stronger Yen

Taro Kono’s renewed calls for a stronger yen through higher interest rates send a clear message. We have tracked this sentiment since mid-2024. With the USD/JPY currently close to 162, the pressure on the BoJ to respond is growing. The central bank has been cautious, keeping its policy rate at only 0.25% more than a year after ending its negative interest rate policy. Political pressure against the BoJ’s slow approach introduces uncertainty, which usually leads to higher volatility. We expect implied volatility on yen currency pairs to increase before the next BoJ meeting in September. Derivative traders should think about buying JPY call options or, more directly, USD/JPY put options. This strategy allows for a defined-risk way to profit if USD/JPY drops sharply, especially if the BoJ surprises the market with a hawkish statement or a rate hike. The likelihood of such a surprise is higher now than it has been in months.

Persistent Inflation And Market Reaction

Our outlook is strengthened by Japan’s ongoing inflation. The latest core Consumer Price Index for July 2025 was 2.8%, significantly above the bank’s target. Even as the U.S. Federal Reserve has gradually lowered its rates to 4.5%, the large interest rate gap still weighs on the yen. This economic situation makes the push for a rate hike more believable. It’s important to remember the market’s response to the BoJ’s unexpected policy change in December 2022, which led to a strong yen rally. The current situation feels similar, where market complacency could face consequences from a sudden policy change. A hint of future action from the BoJ could happen in the next few weeks. Create your live VT Markets account and start trading now.

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