USD/JPY rose above the mid-153.00s in Asia on Wednesday after volatile moves the day before, but stayed below Tuesday’s weekly high as markets awaited the FOMC Minutes.
Japan’s softer Q4 GDP added pressure on Prime Minister Takaichi to consider more stimulus after her landslide victory. The IMF warned against cutting consumption tax, saying it would reduce fiscal space and increase debt risks.
Yen Weakness And Policy Uncertainty
Expectations that Takaichi may resist further Bank of Japan rate rises weakened the yen. A firmer risk mood, linked to easing geopolitical tension and signs of progress in US-Iran nuclear talks, also reduced demand for the yen as a safe haven.
A modest rise in the US dollar supported the pair. Hopes that Takaichi will keep to disciplined public finances and support growth could encourage the BoJ to continue policy normalisation and limit yen falls.
The IMF urged Japan to keep raising interest rates to anchor inflation expectations. The Reuters Tankan poll showed manufacturers’ confidence rose for the first time in three months in February, while exports rose 16.8% year on year in January, the fastest since November 2022.
The dollar may be capped as markets expect several Fed rate cuts this year. Traders are also watching Friday’s US PCE Price Index for more guidance on the rate path.
Market Focus Turns To Rates And Volatility
Looking back to early 2025, we recall the tension in USD/JPY around the 153.00 level, with markets weighing potential Bank of Japan (BoJ) normalization against expected Federal Reserve rate cuts. The debate then was whether new leadership in Japan would allow for tighter policy. That uncertainty created significant two-way volatility for traders.
The policy divergence that we speculated on has since become much clearer, pushing the pair significantly higher. While the BoJ did end its negative interest rate policy last year, its hikes have been minimal, with the overnight call rate currently sitting at just 0.1%. Meanwhile, Japan’s national core CPI has stubbornly remained above the 2% target, recently clocking in at 2.3% year-over-year, keeping pressure on the central bank to act more decisively.
On the other side of the equation, the aggressive Fed cuts anticipated in 2025 were slower to materialize than many expected. We’ve only seen the Fed Funds rate come down by 75 basis points from its peak. Recent data, like last week’s US CPI which came in hotter than expected at 3.2%, has further dampened expectations for deep cuts in 2026, keeping the US dollar supported on interest rate differentials.
With USD/JPY now trading near the 158.00 mark, the risk of official intervention from Japanese authorities is increasing, creating a cap on further upside. We are also seeing from recent CFTC data that speculative net short positions on the yen remain extremely elevated. This crowded trade is vulnerable to a sharp reversal if the BoJ signals a more hawkish stance.
Therefore, traders should consider buying cheap, out-of-the-money puts on USD/JPY, perhaps with a 152.00 strike expiring in the next six to eight weeks. This strategy offers a low-cost way to gain significant leverage to a surprise policy shift or verbal intervention that causes a rapid unwinding of short-yen positions. The defined risk of an options contract is preferable to shorting the pair outright in this environment.
For those who believe the current trend of yen weakness will grind higher before any reversal, a bullish call spread could be a prudent strategy. One could buy a 159.00 strike call and simultaneously sell a 161.00 strike call for the coming month. This approach reduces the initial premium paid, defining the risk while still allowing for profit on a continued, but measured, move upward.
