The USD/JPY fell below 155 due to a softer US dollar and decreasing US yields. There is anticipation in the markets for a possible BoJ rate increase, as the policy remains accommodative despite uncertainty over the neutral rate.
Expectations for a BoJ rate hike have been bolstered by signals from Governor Ueda and a Reuters report suggesting an imminent increase. This potential move could counter the yen’s weakening trend observed since early October.
BoJ Policy and Market Expectations
Governor Ueda reiterated the accommodative nature of the current policy. However, he was unclear about the neutral rate, stating it can only be estimated within a wide range. The future rise in nominal interest rates in Japan will depend on where this rate lies.
The recent dip in USD/JPY below the 155 level is a significant signal, driven by a softer US dollar. With US CPI figures for November 2025 moderating to 2.8%, market pricing now implies at least two more Federal Reserve rate cuts in the first half of 2026. This reinforces the downward pressure on the currency pair.
On the other side, we see the Bank of Japan continuing its hawkish stance, having already moved rates into positive territory back in 2024 and added two small hikes in 2025. Governor Ueda’s recent comments highlight uncertainty around the neutral rate, suggesting the path of future hikes is unpredictable. This ambiguity is a key driver of current volatility.
Traders Strategies and Market Dynamics
This is a stark contrast to the trend we saw through much of 2024, when the pair surged past 160 and intervention was a constant threat. The prevailing strategy now appears to be selling into any strength rather than buying dips. The long-term yen weakening trend seems to have finally reversed course.
Given this environment, traders should consider using derivatives to express a bearish view while managing risk from potential short-term reversals. Buying put options on USD/JPY offers a defined-risk way to profit from further downside. With 3-month implied volatility climbing towards 12%, these positions are more expensive but protect against unexpected yen weakness.
Attention now turns to the final central bank meetings of this year. We believe positioning for the upcoming December policy decisions from both the BoJ and the Fed is critical. Short-dated options or futures can be used to target event-specific price moves.
