Etsuro Honda, an economic adviser to Japan’s Liberal Democratic Party, advised the Bank of Japan (BoJ) to proceed cautiously regarding interest rate hikes. Despite this, the timing of the next rate increase remains uncertain, although Takaichi’s stance suggests a need for caution.

As of now, the USD/JPY is trading lower at 152.60, retreating from a recent high of 153.22. The currency’s performance is influenced by inflation expectations remaining low, and a weak Yen is beneficial during Japan’s economic recovery phase.

Bank Of Japan Monetary Strategy

The BoJ, Japan’s central bank, manages monetary policy to maintain price stability with a 2% inflation target. Since 2013, the BoJ has implemented an ultra-loose monetary strategy using Quantitative and Qualitative Easing to stimulate the economy. In March 2024, it reversed its approach by raising interest rates.

This prolonged stimulus policy caused the Yen to depreciate against major currencies. The depreciation worsened due to policy divergence with other central banks increasing rates. In 2024, the BoJ started reversing its strategy due to increased inflation from a weaker Yen and global energy prices. Rising salaries in Japan further influenced this policy shift.

We are seeing that advisers to Japan’s political leadership are signaling a cautious approach to raising interest rates. This suggests that the Bank of Japan may delay or slow down its pace of monetary tightening in the coming weeks. The currency market is reacting to this, with USD/JPY currently holding just below its recent highs at 152.60.

This cautious stance is understandable given the latest economic data. The most recent core consumer price index for September 2025 came in at just 2.1%, barely above the Bank’s 2% target, suggesting inflation is not running out of control. Furthermore, with GDP growth in the last quarter at a modest 0.8% annualized rate, officials are clearly concerned that higher borrowing costs could damage the fragile economic recovery.

Cautious Market Approach

For derivative traders, this political pressure on the central bank creates policy uncertainty, which could lead to higher implied volatility in the yen. We believe positioning for a potential spike in volatility is a sound strategy. This could involve buying USD/JPY straddles, which would profit from a sharp move in either direction, whether the BoJ stands pat or surprises with a hike.

We must remember that the Bank of Japan only shifted away from its negative interest rate policy back in March 2024. The interest rate differential between the US Federal Reserve, with rates around 4.75%, and Japan’s policy rate of 0.25% remains enormous. This substantial gap continues to favor carry trades, where traders borrow yen to buy higher-yielding US dollars, limiting major downside for the USD/JPY pair.

However, as we approach the 155 level, the risk of direct market intervention from the Ministry of Finance grows significantly, as we saw them do multiple times during the 2022-2024 period. Traders should remain alert for verbal warnings from officials, which often precede actual yen-buying intervention. Hedging long USD/JPY exposure by purchasing out-of-the-money JPY call options could be a prudent way to protect against a sudden, sharp reversal.

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