The Japanese Yen (JPY) continues to struggle against the US Dollar (USD), with the USD/JPY exchange rate hovering around nine-month highs at approximately 154.64. This situation persists even though the US Dollar is generally weaker. Factors such as Japan’s fiscal policies and the Bank of Japan’s careful stance on policy normalization are contributing to this pressure.

Fiscal Measures and Policy Caution

Prime Minister Sanae Takaichi advocates for expansive fiscal measures to support Japan’s delicate recovery. Private-sector advisors are suggesting an extra budget of over ¥14 trillion due to decreasing domestic demand and low wage growth. Takaichi highlights the importance of being cautious to avoid returning to deflation, which could hurt both consumption and investment. Japanese officials are worried about the Yen’s decline but are not planning immediate interventions. Finance Minister Satsuki Katayama mentioned that the government is closely watching changes in the exchange rate, including speculative movements. In the US, attention is focused on the House vote to prevent a government shutdown. While the attempt to reopen the US government gave a short-term boost to the US Dollar, this effect diminished as expectations grew for a rate cut by the Federal Reserve in December. A Reuters poll revealed that 84 out of 105 economists expect a 25 basis point rate cut from the Fed. While the US Dollar remains strong against the Yen, it has seen slight fluctuations against other major currencies. The growing policy gap between a dovish Federal Reserve and an even more cautious Bank of Japan is influencing the market. The Fed is widely anticipated to cut rates in December, with the CME FedWatch Tool showing a 92% chance of a 25-basis-point reduction. This gap is encouraging the carry trade, making long positions in USD/JPY attractive, but the high rates are also creating considerable tension. The main risk of maintaining a long position is potential intervention by the Japanese government, as verbal warnings are increasing. Memories of sharp, sudden drops in USD/JPY in 2022 and 2024, when the Ministry of Finance intervened to defend the Yen at similar levels, are still fresh. The current “high sense of urgency” from officials indicates that while the trend may be upward, there is a significant risk of sudden downturns.

Traders’ Considerations in the Current Climate

Given this risk, traders should consider options to express a bullish outlook instead of holding spot positions that carry unlimited downside. For example, buying USD/JPY call options, such as a January 2026 156-strike option, allows participation in further gains while limiting the maximum loss to the premium paid. This strategy safeguards capital from any sudden drops in value due to intervention. Market indications show expectations of a significant price movement, as one-month implied volatility for USD/JPY has increased to 11.5% from about 8% last month. For those uncertain about the direction but confident in a large swing, a long straddle could be beneficial. This strategy would profit from either a rise above 155 or a sharp drop back towards 150. The fundamental weakness of the Yen is unlikely to change soon, especially with the government planning another substantial supplementary budget. Recent data indicating a 0.2% contraction in Japan’s Q3 GDP adds pressure on policymakers to maintain their supportive roles. This reinforces the reasons behind the Yen’s decline and suggests that upward pressure on USD/JPY will continue until an intervention changes the course. Create your live VT Markets account and start trading now.

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