The Japanese Yen is stable against the US Dollar during the Asian session. However, worries about Japan’s financial health and the upcoming Bank of Japan (BoJ) meeting on Friday have made traders cautious. Potential actions from authorities to support the Yen and expectations of the BoJ tightening policies offer some reassurance. Japan’s Finance Minister has mentioned the possibility of a joint intervention with the US to counter the Yen’s weakness. The prospect of BoJ tightening and safe-haven buying have also helped strengthen the currency. Recent surveys show that Japanese households expect inflation to keep rising, with inflation staying above the Bank’s 2% target for four straight years.

Impact Of Fiscal Policies

Concerns about Japan’s financial situation have pushed government bond yields up, driven by Prime Minister Takaichi’s fiscal policies. Upcoming US reports on PCE and GDP will influence the Fed’s rate decisions, impacting the USD/JPY pair. While the USD has gained recently, it remains under pressure from renewed trade war fears. The USD/JPY bears are in control below the 100-hour SMA, with technical indicators showing little momentum. Market perspectives differ in “risk-on” and “risk-off” scenarios. In “risk-off” situations, currencies like the US Dollar, Japanese Yen, and Swiss Franc gain favor due to their perceived stability. The Yen benefits as domestic investors hold onto their investments, even during crises. As we approach late January 2026, we see a familiar pattern emerging. In 2025, Yen bulls hesitated due to expectations of BoJ tightening and serious concerns about the government’s financial health. This tug-of-war resulted in sharp, tradable movements, and we may see a similar environment now. The case for a stronger Yen is bolstered by BoJ policy, which has gained credibility after two small rate hikes in 2025. With core inflation at 2.3% for December 2025—above the BoJ’s 2% target—markets anticipate at least one more rate hike by mid-year. Traders might consider buying call options on the Yen (or puts on USD/JPY) as they prepare for a potential hawkish surprise from the BoJ.

Challenges From Fiscal Constraints

Still, Japan’s fiscal policy poses challenges that limit the Yen’s potential. The country’s debt-to-GDP ratio is high, recently reported at over 261%, restricting the government’s ability to support the currency without sparking a selloff in the bond market. This indicates that any Yen rallies may not last long, making selling out-of-the-money JPY calls a potentially profitable strategy. Conversely, the situation for the US Dollar has changed from the optimism about rate cuts we saw earlier last year. With US inflation remaining stubbornly high—printing at 3.1% for December—the Federal Reserve’s future decisions are less predictable. This renewed strength in the Dollar suggests the USD/JPY pair is unlikely to drop significantly, even with a hawkish BoJ. This sets the stage for volatility traders in the upcoming weeks. The conflicting drivers—a hawkish central bank versus a weak fiscal situation—create an environment ripe for significant price swings instead of a clear trend. Strategies like long straddles or strangles on USD/JPY, which profit from large movements in either direction, could be effective, especially leading up to the next BoJ meeting. With the current USD/JPY spot price around 148.00, options with strike prices close to the psychological level of 150.00 are likely to see increased activity. Traders should monitor implied volatility closely, as a spike could indicate that the market anticipates a breakout. Setting positions before volatility becomes costly will be crucial. Create your live VT Markets account and start trading now.

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