Insights 
VT 
USD/JPY rose to 150.75 following a brief drop below 149.50. This movement coincides with the formation of a coalition government between Japan’s Liberal Democratic Party (LDP) and the centre-right Innovation Party (Ishin). Together, they occupy 231 seats in the lower house, just two seats short of a majority. The coalition can elect Sanae Takaichi as Prime Minister, but ambitious fiscal plans may face obstacles.
Takata Hajime from the Bank of Japan (BOJ) emphasized his hawkish approach, suggesting it is a suitable time to increase interest rates. In a previous BOJ meeting, Takata and another board member supported a 25bps hike, while the majority voted to maintain a 0.50% rate. A potential rate rise at the October 30 meeting is considered likely by some market analysts.
Japan GDP Growth and Inflation
Japan’s Tankan business survey indicates a recovery in GDP growth, with inflation approaching the BOJ’s 2% target. USD/JPY could reduce as it currently trades above levels suggested by US-Japan bond yield differentials. The FXStreet Insights Team curates market analysis from leading experts, incorporating additional insights from both internal and external analysts.
The rebound in USD/JPY towards 150.75 is a key moment for us. Japan’s new coalition government is weak, sitting two seats shy of a majority, which will likely constrain the expansive fiscal plans of the incoming prime minister. This political backdrop could temper yen weakness caused by government spending fears.
Our focus is squarely on the Bank of Japan’s upcoming meeting on October 30. With board member Takata openly calling for a rate hike and Japan’s core inflation holding at 2.8% in September, the pressure to act is mounting. The market is only pricing in a 26% chance of a hike, creating a significant opportunity if the BOJ surprises us.
Investment Strategies Ahead of BOJ Meeting
For derivative traders, this suggests buying short-dated JPY call options, or USD/JPY put options, that expire after the BOJ meeting is a sound strategy. This provides a defined-risk way to position for a hawkish surprise that could send the yen sharply higher. We expect implied volatility to increase as the meeting approaches.
We also have to consider that the Ministry of Finance has historically intervened to strengthen the yen when USD/JPY approaches the 152 level, as it did in late 2022. The current US-Japan 10-year yield spread of 360 basis points still favors the dollar, but the currency pair is trading above the level even this wide spread would imply. This valuation gap suggests the risk is skewed towards a lower USD/JPY in the coming weeks.
