The USD/JPY pair has risen by 0.17% to around 156.30, despite possible changes in the Bank of Japan’s monetary policy for 2026. The BoJ Summary of Opinions suggests further interest rate hikes could stabilize the Yen. During a recent meeting, the BoJ raised rates by 25 basis points to 0.75%. The yen remains weak compared to other currencies, especially the Australian Dollar.

The US Dollar Index

The US Dollar Index is stable at approximately 98.00 as we await the FOMC minutes. Recently, the Federal Reserve cut interest rates by 25 basis points to a range of 3.50%-3.75%, projecting just one rate cut for 2026. The BoJ’s previous ultra-loose monetary policy caused the yen to weaken. In 2024, the BoJ raised rates to combat inflation, which surpassed its 2% target. Factors like a weaker yen and rising global energy prices influenced this shift. As Japan’s central bank, the BoJ aims for price stability with an inflation target around 2%. Since 2013, the BoJ has employed Quantitative and Qualitative Easing, including negative interest rates and yield controls on government bonds. As of December 30, 2025, there appears to be a conflict between central bank policies and market trends. The BoJ is leaning towards more rate hikes in 2026, while the Federal Reserve has cut rates three times this year, with more cuts anticipated next year. Despite this, the USD/JPY is rising toward 156.30, indicating that the market may be skeptical about the BoJ’s commitment or still focused on the current rate gap.

Potential Carry Trade Risks

The fundamentals suggest a stronger yen in the coming weeks. Japan’s recent data shows core inflation has stayed above the 2% target, reaching 2.6% in November 2025, giving the BoJ strong reasons to stick to its hawkish stance. Meanwhile, the three Fed rate cuts in 2025 were prompted by a cooling US economy, with unemployment increasing to 4.1%, justifying their dovish approach. However, the large interest rate gap—3.50% for the Fed and only 0.75% for the BoJ—still makes it attractive to borrow yen to buy dollars. This dynamic is likely keeping the USD/JPY elevated. Remember, Japan’s Ministry of Finance made sharp interventions in 2022 and 2024 when the yen weakened to similar levels, making a long USD/JPY position riskier. This environment is perfect for using options to manage risk and speculate on upcoming volatility, especially with the FOMC minutes approaching. Traders expecting policy divergence can buy JPY call options or USD put options to hedge against a drop in USD/JPY. Alternatively, given the risk of intervention and uncertainty from the Fed, a long straddle could be effective for profiting from significant price swings in either direction in the coming weeks. Create your live VT Markets account and start trading now.

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