The USD/JPY has risen for the second day in a row, getting close to the weekly high of 156.70. This increase is due to the US Dollar gaining strength. The rise follows the FOMC Minutes release, where Federal Reserve officials agreed to cut rates by 25 basis points in December.

Focus on Federal Reserve and Bank of Japan Policies

Even with ongoing inflation concerns, the Federal Open Market Committee is leaning toward supporting a weakening job market by lowering borrowing costs. They expect another rate cut might happen by 2026, but markets are looking for at least two cuts in the next year. The Bank of Japan has confirmed its goal of higher rates, yet it hasn’t committed to a timeline for the next increase. The Yen has been losing value as the market assesses the likelihood of a future rate cut, especially since its policies are much looser compared to other central banks. The Japanese Yen’s strength can be influenced by several factors, such as the Bank of Japan’s policies, differences in bond yields, and overall market risk sentiment. As a safe haven, the Yen often gains strength during market turmoil because of its stability and reliability. Currently, the US Dollar is strengthening against the Yen, pushing the pair close to the 156.70 mark. This is due to recent meeting minutes from the Federal Reserve, which showed caution regarding future rate cuts. The latest Core PCE inflation rate stands at 3.1%, well above the Fed’s 2% target, explaining their cautious approach.

Market Strategies and Risk Management

On the flip side, the Yen is weakening as questions arise about the Bank of Japan’s plans to increase interest rates. The recent Tokyo Core CPI has remained above the BoJ’s target for over a year and a half, but the bank has not provided a clear timeline for its next increase. This difference in policies is what keeps the dollar strong against the Yen. We must also keep an eye on the US labor market, which shows signs of weakness. The latest Non-Farm Payrolls report from early December 2025 added only 95,000 jobs, falling short of expectations. This has led to the Fed’s decision to lower rates, placing them in a tough spot as they balance a weak job market with ongoing inflation. For traders in derivatives, this environment suggests that holding long positions in the dollar against the Yen could be profitable into early 2026. Buying call options on USD/JPY could allow for further gains if this trend continues. However, with the pair reaching these high levels, we need to consider the increasing risk of intervention from Japanese authorities, similar to what occurred in 2022. To hedge against a sudden market reversal, purchasing out-of-the-money put options on USD/JPY can be a cost-effective strategy. Right now, volatility is low due to holiday trading, which makes options pricing appealing for strategies anticipating a breakout in early January. We expect that volatility will rise as more market participants return in the new year. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now