USD/JPY fell for a fourth day on Thursday, with the Yen stronger and the pair near 152.80. The move leaves USD/JPY down about 2.75% so far this week.
The Yen stayed supported after Prime Minister Sanae Takaichi won Japan’s general election last Sunday. Markets are also weighing expectations of a Bank of Japan rate rise as early as March or April.
Japan Political And Policy Backdrop
Traders remained cautious due to possible currency action after repeated official warnings. Currency diplomat Atsushi Mimura said authorities are “on high alert” to excessive FX volatility and are monitoring moves with urgency, while staying in contact with US officials.
The US Dollar also weakened, with the Dollar Index near 96.95, close to two-week lows. US data showed Initial Jobless Claims at 227K versus 232K, above the 222K forecast, and Continuing Claims at 1.862M versus 1.841M.
January Nonfarm Payrolls rose by 130K, above a 70K forecast, and the Unemployment Rate edged down to 4.3% from 4.4%. Attention turns to Friday’s US CPI, with markets pricing about 50 bps of easing by year-end.
Given the sharp 2.75% drop in USD/JPY this week to the 152.80 level, we should anticipate continued yen strength. The new government’s agenda combined with the Bank of Japan’s hawkish tone creates a powerful narrative pushing the pair lower. Implied volatility on one-month options has surged to 11.5%, a substantial increase from the 8% range seen through much of late 2025, suggesting the market is bracing for bigger moves.
Options Positioning Ahead Of CPI
With the crucial US Consumer Price Index report imminent, holding outright short positions is risky due to the potential for a sharp upward reversal on a hot inflation print. A more prudent approach is to buy USD/JPY put options, which provides downside exposure while capping risk at the premium paid. We are looking at March and April expirations with strike prices around the 150.00 psychological level to position for a further breakdown.
The threat of currency intervention from Japanese authorities introduces significant event risk, which could trigger a sudden, dramatic move. We saw a similar situation in late 2024 when intervention fears caused a multi-figure drop in the pair within hours. Therefore, a long straddle, buying both a call and a put option, is a viable strategy to profit from a large price swing in either direction following the CPI data or official action.
The fundamental divergence between central banks remains the key long-term driver for this trade. Futures markets are now pricing in a 90% probability of a 10-basis-point rate hike from the Bank of Japan by April. In contrast, Fed funds futures still indicate a 75% chance of a 25-basis-point rate cut from the Federal Reserve by June, reinforcing the downward pressure on the pair for the coming months.
