The yen firmed a little overnight, and USD/JPY moved back under 156.00 after reaching 156.82. The move came as doubts stayed over how quickly the Bank of Japan may tighten policy.
Japan’s government, led by Prime Minister Takaichi, nominated two new BoJ board members seen as dovish and supportive of reflation. This has raised concerns that policy normalisation could proceed slowly.
Expectations for near-term BoJ policy have not shifted much. Markets still price a high chance of the next rate rise as soon as April, with about 17bps priced in, and another rise is almost fully priced in by year end.
A weaker yen and higher oil prices linked to military tensions in the Middle East are near-term upside risks for inflation. A sustained rise in oil prices could also add pressure on currencies of energy-importing economies such as Japan and Europe, while supporting the US dollar.
The yen has shown some minor strength, but the overall trend looks weak as USD/JPY struggles to stay below the 156.00 level. Doubts about the Bank of Japan’s willingness to normalize policy are growing, especially after the government nominated two dovish members to the board. This signals that any moves toward higher interest rates will likely be slow and cautious.
We are watching Japan’s core inflation, which came in at 2.4% for January, staying above the 2% target for nearly two years. This persistent inflation is why interest rate markets are pricing in a nearly 70% chance of a rate hike by April, even if the BoJ itself sounds hesitant. Traders should consider options strategies that benefit from this uncertainty, such as buying USD/JPY call options targeting the 158.00 level.
The risk from rising oil prices cannot be ignored, as it directly weakens the yen. With WTI crude now hovering near $88 a barrel, up from an average of $82 in the last quarter of 2025, Japan’s import bill is rising. This situation puts more pressure on the yen and supports a stronger US dollar.
We remember the BoJ’s first small rate hike to 0.1% in November 2025, which did little to stop the yen’s slide. Given this history, the 155 level for USD/JPY now appears to be a solid floor for the currency pair. Therefore, selling out-of-the-money yen puts, which bet on the currency not strengthening significantly, could be a viable strategy in the coming weeks.
