Insights 
VT 
The USD/JPY pair weakened to around 152.20 during Wednesday’s early Asian session. This movement occurred as the Japanese Yen gained strength following officials’ efforts to reduce concerns about Japan’s policy.
A significant focus is on the US Federal Reserve’s pending interest rate decision, where a 25 basis point rate cut is highly anticipated. Meanwhile, a framework between the US and Japan has been signed to secure critical minerals and rare earths.
Japan Economic Minister Comments
Japan’s Economic Minister expressed methods for stimulating growth and monitoring currency impacts. Market caution persists ahead of the Federal Reserve’s meeting, with potential further interest rate reductions predicted in upcoming sessions.
Key observations will follow the Federal Reserve’s press conference, noting any dovish statements that might further influence currency movements. The Japanese Yen is influenced by factors, including the Bank of Japan’s policy, bond yield differentials, and broader risk sentiment.
Historically, the Bank of Japan’s lean towards an ultra-loose monetary policy has affected the Yen’s performance. However, policy adjustments and evolving interest rate landscapes are now narrowing yield differentials with the US.
During periods of market stress, the Japanese Yen often functions as a safe-haven investment, appealing due to its perceived reliability. This safe-haven status can strengthen the Yen against more volatile currencies in uncertain times.
USD JPY Strategy and Fed Impact
With USD/JPY dipping below 152.50, the immediate focus is on the Federal Reserve’s decision later today. A 25 basis point rate cut is already baked into the price, so the real market-moving information will come from Jerome Powell’s forward guidance. We see this as a signal to position for further downside in the currency pair.
Given this outlook, we believe buying USD/JPY put options is a prudent strategy for the coming weeks. This allows us to profit from a potential decline if the Fed signals more aggressive cuts into 2026, a sentiment echoed by recent market surveys. Opting for contracts expiring in December 2025 or January 2026 could capture this expected momentum.
This situation feels very similar to what we experienced in late 2023 when the Fed first signaled its policy pivot away from rate hikes. Back then, the mere expectation of future cuts caused a significant shift in currency dynamics long before the first cut was enacted. We anticipate a comparable reaction now, especially with Japan signaling a less expansionary stance.
The underlying numbers support this view, as the interest rate differential between US and Japanese 10-year government bonds is beginning to narrow, recently tightening by over 20 basis points from its peak earlier this year. According to the CME Group’s FedWatch Tool, traders are now pricing in an over 60% probability of at least two more rate cuts by March 2026. This data reinforces our expectation of a weaker dollar against the yen.
However, implied volatility is high ahead of the Fed announcement, making options more expensive. To manage this cost, we can construct a bear put spread by buying a put option and simultaneously selling another one at a lower strike price. This strategy reduces the initial cash outlay and provides a defined profit zone if the pair continues its downward trend.
