The USD/JPY pair fell below the 155.00 mark due to strong demand for Japan’s 30-year government bonds, which resulted in lower yields. The 30-year bond’s average bid-to-cover ratio in December reached 4.04, the highest since May 2019, compared to 3.125 in November.
The swaps market has almost fully priced in a 25 basis point rate hike by the Bank of Japan to 0.75% on 19 December. Accompanying this, Japan’s latest fiscal stimulus favours the JPY, indicating potential further adjustments for USD/JPY towards the level suggested by the US-Japan two-year bond yield spreads, around 140.00.
Breaking Below Key Level
The USD/JPY pair has broken below the key 155.00 level, signaling a potential shift in momentum. This move is driven by a widening policy gap, as markets anticipate the Federal Reserve will cut rates on December 10th while the Bank of Japan is expected to hike. We are seeing a fundamental repricing of the Yen, which has been undervalued for a long time.
Strong demand for Japanese government bonds confirms this sentiment, with the bid-to-cover ratio on the latest 30-year auction hitting a high not seen since May 2019. Reinforcing the case for a rate hike, Japan’s national Core CPI for October 2025 came in at 2.9%, marking the 19th consecutive month it has remained above the BoJ’s 2% target. This sustained inflation gives the Bank of Japan a clear mandate to tighten policy on December 19th.
Conversely, the US dollar is weakening because the market is focused on the Fed’s dovish turn. The latest US Core PCE Price Index reading of 2.8% for October 2025 supports expectations for a rate cut next week. This policy contrasts sharply with the aggressive hiking cycle we saw through 2022 and 2023.
Strategies for Traders
For derivative traders, this points towards positioning for further Yen strength against the dollar in the coming weeks. We believe purchasing JPY call options or USD put options with expirations after the December 19th BoJ meeting could be an effective strategy. This allows traders to capitalize on a potential drop towards the 140.00 level, which aligns with interest rate differentials.
