Insights 
VT 
The USD/JPY pair remains steady above 152.40, with the dollar showing positive weekly performance despite failing to surpass 153.00. Attention is directed at upcoming speeches from Fed officials Powell and Bowman.
Sanae Takaichi’s unexpected victory in Japanese politics raises concerns about potential looser fiscal and monetary policies, which could delay interest rate hikes. Etsuro Honda suggests the Bank of Japan should avoid rate increases for now.
Fed Minutes Suggest Potential Changes
In the US, Fed minutes suggest potential interest rate cuts in the coming months, unaffected by the government shutdown. Traders anticipate the Fed’s policy hints from Powell and Bowman’s speeches.
The Bank of Japan is responsible for monetary policy focusing on price stability, targeting 2% inflation. Since 2013, it applied ultra-loose policies, eventually shifting to control bond yields and negative rates. The Yen depreciated under these policies, changing in 2024 as higher inflation prompted a policy shift.
The BoJ’s stimulus affected Yen valuation, diverging from other central banks’ higher interest rates. In 2024, the BoJ revised its policy with rising inflation and wage expectations. This included retreating from its previous stance due to energy prices and inflation pressures.
The USD/JPY is stuck in a tight range, unable to push past 153.00 but finding strong support above 152.40. This kind of consolidation often happens before a big move, so we are preparing for an increase in volatility. We see this as an opportunity to use options strategies that profit from a breakout.
Japan’s New Political Landscape
The new political leadership in Japan is the most important factor right now, as it appears to favor a weaker yen to stimulate the economy. This view was reinforced by last week’s preliminary data showing Japan’s Q3 GDP unexpectedly contracted by 0.2%, giving the new government a reason to pressure the Bank of Japan to halt its tightening cycle. A dovish BoJ is a strong signal for us to expect further yen weakness.
However, the US Dollar has its own headwinds, with widespread expectations for Federal Reserve rate cuts later this month and again in December. The CME FedWatch Tool, as of this morning, shows an 85% probability of a 25-basis point cut at the October 29th meeting. Today’s speeches from Fed officials will be critical in confirming if this market pricing is correct.
We cannot ignore the risk of direct intervention from Japanese authorities to strengthen the yen. Looking back at history, we are now trading well above the 151.90 level that triggered significant yen-buying intervention in October 2022. Any sharp move higher could be met with a swift and sudden response from the Ministry of Finance.
Given these conflicting drivers, we believe a cautiously bullish outlook on USD/JPY is warranted, but with defined risk. We are looking at strategies like bull call spreads, which would profit from a move towards 154.00 over the next few weeks. This approach allows for upside potential while capping our losses if Japanese officials intervene or the Fed sounds surprisingly hawkish.
