The USD/JPY has fallen to its lowest level in weeks, down about 1.4% after a suspected ‘rate check’ by the Japan Ministry of Finance. Concerns over the yen’s excessive weakness have raised fears of government intervention, with the pair trading close to 156.18, the lowest since December. This decline is also linked to a general weakening of the US Dollar. Worries about the Federal Reserve’s independence and US protectionist trade policies have shaken confidence in the Dollar. The US Dollar Index is around 98.76, near its lowest value since early October.

Bank Of Japan’s Stance

The Bank of Japan decided to keep interest rates at 0.75%, despite some board members pushing for a hike to 1.00%. The BoJ anticipates moderate economic growth but expects headline inflation to fall below 2%, with stronger underlying inflation to follow later. Focus is now turning to US monetary policy, where the Federal Reserve is expected to hold current rates at the upcoming January FOMC meeting. However, two rate cuts are anticipated later this year, which may put additional downward pressure on the Dollar. The Federal Reserve aims to keep inflation at 2% and maintain full employment by adjusting interest rates. Changes in rates affect the strength of the Dollar, as hikes attract foreign investment, while cuts may lead to capital outflows. The next decision on rates is set for January 2026. The significant drop in the USD/JPY after the suspected rate check signals that we should take the possibility of direct intervention seriously. This indicates that officials are uncomfortable with the yen’s weakness, making it risky to hold long Dollar positions against the yen. Traders might want to prepare for a potential rise in yen strength soon. We’ve seen situations like this before, where changes happen quickly and dramatically. Looking back at the interventions in 2022 and rumored actions in spring 2024, Japanese authorities have previously spent tens of billions to defend their currency when necessary. The current decline to the 156 level suggests a new defensive line may be forming, well below the 160 peak seen in 2024.

Shifting Fundamentals

Fundamental factors are changing and are now favoring the yen, creating a strong tailwind. The Bank of Japan is hinting at future rate increases from the current 0.75%, while the market is pricing in two cuts from the U.S. Federal Reserve this year. This narrowing interest rate gap unwinds the carry trade that has negatively affected the yen in recent years. Expectations of Fed cuts are supported by economic data showing a slowdown in the U.S. For instance, the latest core Personal Consumption Expenditures (PCE) Price Index, which is the Fed’s preferred measure of inflation, decreased to an annualized rate of 2.5% in December 2025. This data gives the central bank room to start easing policy later this year, which continues to weaken the Dollar. For those trading derivatives, this environment suggests considering USD/JPY put options to benefit from possible further declines. Increased intervention threats have likely raised implied volatility, making options pricier but potentially more advantageous if a sharp shift occurs. Selling volatility through strategies like short strangles could be particularly risky until the intervention threat diminishes. All eyes will now be on the Federal Reserve’s meeting on January 28. While no rate change is expected, the tone of the announcement will be crucial. Any indication of a shift toward more lenient policies, which supports market expectations for future rate cuts, could lead to another sell-off of the US Dollar. Create your live VT Markets account and start trading now.

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