The USD/JPY exchange rate reached close to 156.00 during the early Asian trading hours after the Federal Reserve announced a rate cut. The Fed reduced the benchmark federal funds rate by 25 basis points, bringing it to 3.5%-3.75%. This led to a drop in the US Dollar’s value compared to the Yen. Fed Chair Jerome Powell mentioned that this reduction strengthens the central bank’s position. According to the CME FedWatch tool, there is a 77% chance that there will be more rate cuts next year. Additionally, Japan’s Prime Minister Sanae Takaichi is promoting pro-growth plans, which may indicate possible fiscal stimulus that could affect the Yen.

Factors Influencing the Japanese Yen

The value of the Japanese Yen is affected by Japan’s economic performance, the Bank of Japan’s policies, bond yield differences, and overall market sentiment. The BoJ usually aims to weaken the Yen, but their monetary policies help maintain currency stability. The gap in bond yields between the US and Japan is widening, benefiting the Dollar. However, as the BoJ moves away from ultra-loose policies and other central banks cut rates, this gap is beginning to close. The Yen is also influenced by risk sentiment. It is often seen as a safe haven, attracting investors during market volatility, which can increase its value against riskier currencies. With the Federal Reserve cutting rates, the main trend for USD/JPY is likely to decline over the next few weeks. The interest rate gap that has supported the pair is narrowing, with the US 10-year yield falling to 3.9% and the Japanese 10-year JGB steady at 1.1%. This suggests that we should prepare for a move down to the 155.00 level.

Investment Strategies Amid Market Uncertainty

Given this outlook, buying put options expiring in January 2026 is a smart strategy. Following the Fed’s announcement, one-month implied volatility rose to 9.5%, indicating expected price fluctuations while providing a defined-risk method to capitalize on the downtrend. This approach shields against sudden sharp movements during the typically quieter holiday trading period. It’s also important to monitor potential fiscal stimulus from Japan. Prime Minister Takaichi’s government is likely to release a supplementary budget in early January that could weaken the Yen temporarily, causing the USD/JPY pair to bounce back. This risk makes outright shorting the currency pair more dangerous than using options. Looking back, this shift from the Fed follows the BoJ’s gradual move away from ultra-loose policies throughout 2024, which had already bolstered support for the Yen. The CME FedWatch Tool indicates a high chance of two more rate cuts in 2026, further establishing a bearish trend for the Dollar. Any strengthening in the USD/JPY pair should be seen as an opportunity to sell. Create your live VT Markets account and start trading now.

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