**USD/JPY Stable Amid Fiscal Concerns** **Japanese Government Bond Yields Surge** The Japanese yen is mainly affected by the Bank of Japan’s monetary policy, the difference in bond yields between the US and Japan, and global market sentiment. These factors significantly influence the yen’s value. Often seen as a safe-haven asset, the yen attracts investment during market instability, leading to its strength compared to more volatile currencies during stressful global events. In 2025, USD/JPY remained around the 158 level due to two main issues. One was fears of a “Sell America” trend caused by tariff threats, while the other was Japan’s growing fiscal troubles, which added pressure on the yen. Ultimately, the worry about Japan’s economic direction became the stronger influence on the market over the past year. **US Tariff Threats and Market Responses** The tariff threats against Europe did not cause a lasting decline for the dollar, as some predicted. Instead, the market adjusted trade flows, shifting its focus to the Federal Reserve’s consistent interest rate policy amidst ongoing, though easing, inflation. Now, with USD/JPY near 165.50, the dollar’s yield advantage has become the key point of interest. On the other hand, concerns about Japan’s fiscal situation have grown. The government’s debt-to-GDP ratio has exceeded 268%, raising fears that prolonged yen weakness may be necessary to reduce this burden. This environment has encouraged traders to bet against the yen. The Bank of Japan’s gradual exit from its very loose monetary policy has disappointed those hoping for a stronger yen. The interest rate gap between US and Japanese 10-year government bonds is still large, around 3.5 percentage points. This makes borrowing yen to buy dollars, a strategy known as the carry trade, very appealing. Looking ahead, this situation suggests that using options to gain long exposure to USD/JPY is a smart choice. Buying call spreads could be a cost-effective way to profit as the pair moves higher towards the 168-170 range. Traders should stay vigilant for any strong warnings from Japanese officials, as the risk of currency intervention increases with rising prices. **Create your live VT Markets account and start trading now.**

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