Insights 
VT 
The USD/JPY pair experienced slight losses, trading near 152.75 during the early Asian session on Tuesday. Optimism over a US-China trade deal could limit these losses, with US President Trump set to meet Japan’s Prime Minister Sanae Takaichi, and the Federal Reserve’s interest rate decision anticipated on Wednesday.
A preliminary US-China agreement aims to avoid new tariffs and ensure the flow of rare earth minerals to the US. Trump expressed confidence in reaching a deal with China, which may reduce tensions. Positive trade developments could increase risk appetite and negatively affect safe-haven currencies like the Japanese Yen.
Federal Reserve and Bank of Japan Decisions
The Federal Reserve is expected to cut interest rates by 25 basis points on Wednesday, bringing the rate target to 3.75%-4.00%. Japan’s Prime Minister Takaichi might announce a major stimulus package to support the economy. The Bank of Japan is anticipated to keep its interest rate at 0.5% on Thursday, with traders watching for guidance from BoJ Governor Ueda.
The Japanese Yen is influenced by the country’s economic performance, BoJ policy, bond yield differentials, and market sentiment. Historically, the BoJ’s ultra-loose monetary policy has impacted the Yen’s value, but this is changing as the policy gradually unwinds. In times of market stress, the Yen often strengthens due to its perceived stability.
We see the USD/JPY pair hovering below the 153.00 level, a zone that has historically drawn attention from policymakers. With both the Federal Reserve and Bank of Japan meetings this week, we expect a significant increase in market volatility. Implied volatility for one-month USD/JPY options has already climbed to over 12%, reflecting trader uncertainty about the coming policy announcements.
The Federal Reserve is widely expected to deliver a 25 basis point rate cut, but the market has largely priced this in. We will be looking for clues in their forward guidance, as any signal of a more aggressive cutting cycle into 2026 could weaken the US Dollar. A dovish surprise from the Fed could make USD/JPY put options an attractive strategy to hedge against a downturn.
On the other hand, the Bank of Japan is likely to hold its policy rate steady at 0.5%, with Prime Minister Takaichi favoring further fiscal stimulus. This policy divergence keeps the carry trade alive, supported by the wide gap between US and Japanese bond yields, with the US 10-year Treasury currently yielding around 4.25% compared to the 10-year JGB at 0.95%. Recent data from the CFTC shows non-commercial traders have increased their net short positions against the Yen, betting this trend continues.
Potential Risks and Trade Considerations
The biggest risk to holding long USD/JPY positions is the threat of intervention from Japanese authorities. We saw this happen several times back in 2022 when the pair crossed the 150 mark, leading to sharp, sudden drops in the exchange rate. Traders should therefore consider using call options to limit downside risk or keep tight stop-losses on any long futures positions.
Optimism surrounding a potential US-China trade deal later this week adds another layer of complexity. A successful deal would likely fuel a risk-on sentiment, which typically weakens the safe-haven Yen and could push USD/JPY higher. Conversely, if the talks falter, we could see a flight to safety that would strengthen the Yen and send the pair sharply lower.
