Insights 
VT 
The USD/JPY pair is trading just below 155.00 following Japan’s Q3 GDP figures, which showed a smaller contraction than anticipated. Japan’s Q3 GDP decreased by 0.4% quarter-on-quarter, compared to an expected 0.6% drop, after a 0.6% increase in Q2.
The contraction was mainly due to declines in residential construction and exports. However, private domestic demand remained steady, with household consumption rising by 0.1% quarter-on-quarter and private non-residential investment increasing by 1%.
BOJ Rate Hike Expectations
The market’s expectation for a December BOJ rate hike has decreased, with the probability dropping to 30% from last week’s 50%. Nonetheless, enhanced fiscal measures planned by Prime Minister Takaichi could increase the possibility of policy tightening, with a new economic package set to surpass last year’s ¥13.9 trillion supplementary budget.
The market seems to be betting against a Bank of Japan rate hike next month, but we see signs that the Japanese economy is more resilient than expected. The recent Q3 GDP numbers shrank less than feared, and crucially, domestic spending and business investment remain firm. This tells us the foundation of the economy is solid.
We believe the risk of a December 19th rate increase is being underestimated, especially with the government planning another large spending package. Japan’s latest Tokyo Core CPI for October 2025 came in at 2.9%, which has remained above the BOJ’s 2% target for over a year and a half. This persistent inflation, combined with fiscal stimulus, creates significant pressure on the central bank to act.
Trading Opportunities
Given that the swaps market is only pricing in a 30% chance of a hike, there’s a clear opportunity for traders. This low probability suggests that options are not fully pricing in the potential for a hawkish surprise from the BOJ. The current setup allows for positioning ahead of a possible shift in sentiment.
We see value in buying derivatives that would profit from a stronger yen, such as USD/JPY put options expiring after the December meeting. These options are likely inexpensive due to the market’s dovish expectations. A move by the BOJ could cause the USD/JPY to drop sharply from its current level just below 155.
One-month implied volatility for the pair is hovering around 8.5%, which seems too low given the binary risk of the upcoming meeting. We saw how the BOJ surprised markets a few years ago in December 2022 with a sudden policy tweak that sent the yen soaring. Buying straddles or strangles could be a prudent way to trade the potential for a significant move, regardless of the direction.
