The USD/JPY rose to about 156.75 during the early Asian session on Friday. The Japanese Yen weakened against the US Dollar due to the slow pace of the Bank of Japan’s monetary tightening. The Bank of Japan increased its policy rate to 0.75% from 0.50%, the highest rate in 30 years. However, traders were disappointed by the lack of guidance on future rate increases, which negatively affected the Yen.

Potential Risks to the USD

The US Federal Reserve may cut interest rates further by 2026, posing a risk to the US Dollar against the Yen. President Trump’s support for a dovish Federal Reserve Chair raises concerns about the Fed’s independence. The Yen is influenced by the Bank of Japan’s policies, bond yield differences, and market sentiment. The recent easing of the BoJ’s ultra-loose policy offers some support to the Yen against other major currencies. During stressful times, the Yen is seen as a reliable choice. The BoJ’s gradual policy changes and interest-rate cuts in other countries also affect currency movements. The outlook for USD/JPY depends on central bank policies and overall market sentiment. Financial markets are closely watching upcoming decisions from both the Bank of Japan and the US Federal Reserve.

Market Disappointment Continues

With USD/JPY near 156.75, the market’s disappointment in the Bank of Japan’s slow pace is clear. The BoJ’s small rate hike to 0.75% in December 2025 didn’t provide enough tightening to strengthen the Yen. This cautious approach continues to support a stronger Dollar against the Yen for now. However, we must also consider the pressure on the US Dollar. In 2025, the Federal Reserve cut rates three times. The latest jobs report from December 2025 showed only 155,000 jobs added, which raises the likelihood of more cuts. This situation suggests that the upward movement of USD/JPY may be limited in the coming weeks. Given the weak Yen and a potentially weakening Dollar, traders should think about strategies that benefit from increased volatility. Options strategies like straddles could work well, especially given the political uncertainty surrounding the Fed’s leadership, which could cause sharp price movements. The current high price makes long positions risky. Historically, we are nearing levels that have led to market intervention. The last time USD/JPY was this high was during the significant interventions of 2024, and before that, in 1990 when it exceeded 160. This suggests that purchasing far out-of-the-money call options could be a costly mistake if authorities decide to intervene to support the Yen. On the Japanese side, recent data shows that Tokyo’s core inflation for December 2025 remained at 2.4%, staying above the BoJ’s 2% target for more than a year and a half. This ongoing inflation puts pressure on the central bank to act more decisively than indicated in their December meeting. Any sign of an accelerated rate hiking schedule would likely strengthen the Yen quickly. Meanwhile, uncertainty about the Fed’s independence is a major concern. As we start 2026, the CME FedWatch Tool shows a 22% chance of a rate cut in the January meeting. This reflects growing market worry that political pressure could influence the Fed, which may limit how high USD/JPY can rise. Create your live VT Markets account and start trading now.

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