Insights 
VT 
US President Trump and Japan’s Prime Minister Sanae Takaichi met in Tokyo to discuss and sign a framework for securing the supply of critical minerals and rare earths. Trump acknowledged Japan’s military equipment order and praised Takaichi as Japan’s first female prime minister.
The USD/JPY pair is currently down by 0.32% at 152.40. The Japanese Yen, one of the world’s most traded currencies, sees its value influenced by Japan’s economic performance, the Bank of Japan’s policies, and the differential between Japanese and US bond yields.
Role of the Bank of Japan
The Bank of Japan plays a major role in currency control, occasionally intervening in the currency markets to lower the Yen’s value. The BoJ’s ultra-loose monetary policy between 2013 and 2024 led to Yen depreciation, but recent policy changes provide some support.
A widening policy divergence due to the BoJ’s ultra-loose policy and US Federal Reserve actions has favoured the US Dollar over the Yen. However, the BoJ’s 2024 decision to end this policy, along with interest rate cuts elsewhere, is narrowing the bond yield differential.
The Yen is considered a safe-haven investment, gaining strength during market uncertainties, as it is viewed as stable and reliable compared to more risky currencies.
Market Opportunities in the Options Market
The new US-Japan deal is positive for the alliance, but for us, the focus remains on the USD/JPY exchange rate. The pair is trading at 152.40, a level that has historically drawn direct intervention from Japanese authorities. We must remember the massive intervention that occurred back in the autumn of 2022, which showed officials are willing to act forcefully around these levels.
This tension suggests that a period of low volatility is unlikely to last, creating opportunities in the options market. Implied volatility for USD/JPY options, which recently hit a low of 6.8% for one-month contracts, is likely to rise as the market prices in a higher chance of a sudden move. We should consider strategies that profit from a large price swing, as the risk of a policy announcement from the Bank of Japan is elevated.
We are also watching the narrowing yield differential between US and Japanese government bonds. After peaking above 400 basis points back in 2023, the spread has been compressing since the Bank of Japan officially ended its negative interest rate policy in March 2024. This fundamental shift reduces the appeal of borrowing yen to buy dollars, a core trade that has kept the yen weak for years.
The popular carry trade is now looking increasingly risky at these exchange rate levels. Data on speculative futures positions shows that bearish bets against the yen remain historically high, with net short contracts recently exceeding 100,000. This crowded positioning means any catalyst for yen strength could trigger a rapid unwinding, causing an exaggerated downward move in USD/JPY.
