USD/JPY rose above 155 on broad US Dollar strength, despite geopolitical risk that can support the Japanese Yen as a safe haven. US-Iran tensions have risen, with a US strike mentioned within the next 10 days without a deal, and Iran warning it would target bases and assets of hostile forces if attacked.
The Swiss Franc and Japanese Yen may attract safe-haven demand if conflict in the Middle East persists. Attention is also on Japan’s FY26 budget talks and a proposal to suspend the consumption tax on food for two years.
Dollar Strength Versus Safe Haven Flows
The IMF has urged Japan to avoid cutting the consumption tax, citing expected increases in debt servicing and welfare costs. The IMF also expects the Bank of Japan to raise its policy rate twice this year and puts Japan’s neutral rate at 1.5%.
Japan’s headline inflation eased to 1.5% year on year in January, down from 2.1% in December. Core-core CPI inflation stayed at 2.6% year on year, indicating ongoing broad price pressures.
We are seeing USD/JPY push above 155, driven by broad dollar strength that is reinforced by the latest US jobs report from early February showing continued wage growth. This underlying trend, however, is being challenged by escalating geopolitical tensions that could ignite the yen’s safe-haven appeal. Traders must therefore be prepared for a sharp move driven by news rather than just economic data.
The immediate risk of a US-Iran conflict is causing significant uncertainty, which is why we’ve seen the CBOE Volatility Index (VIX) climb to over 20 this week. This environment suggests traders should consider buying volatility through options like straddles on USD/JPY. Such a strategy would profit from a large price swing in either direction over the coming weeks, without needing to predict the outcome of the conflict.
Positioning Around Policy And Volatility
In Japan, the core-core inflation rate remains elevated at 2.6%, giving the Bank of Japan justification for further rate hikes this year. We saw their last rate hike in December 2025 did little to stop yen weakness, and now the market is focused on the upcoming FY26 budget debate. A potential suspension of the food consumption tax would likely work against the BoJ’s policy and keep the yen under pressure.
Given the immediate risk of conflict, buying short-dated, out-of-the-money USD/JPY puts could be a cost-effective hedge against a sudden flight to safety into the yen. If Middle East tensions de-escalate and US data remains strong, the broader uptrend will likely resume, limiting the loss to the small premium paid. The key is to position for a sharp, sudden move rather than a slow grind.
