The USD/JPY is trading close to 155.00 following positive results from Japan’s Q4 Tankan survey. The all-industries business conditions index rose to 17, marking its highest point since Q3 2018.
Analysts project the Bank of Japan to increase the policy rate by 25 basis points to 0.75%, a first since January. There is speculation that the USD/JPY could lower towards 140.00, in line with US-Japan two-year bond yield spreads.
Potential Shift in USD/JPY
The USD/JPY is holding near 155, but strong domestic data from Japan suggests a potential shift. The latest Tankan survey showed business conditions at their best since the third quarter of 2018, signaling a resilient economy. This strength provides a solid foundation for the Bank of Japan to continue its policy normalization.
All eyes are on the Bank of Japan meeting this Friday, where a 25 basis point rate hike to 0.75% is widely expected. This would be the second rate increase in 2025, following the hike back in January. This confirms we are in a clear tightening cycle, a major change from the policies of previous years.
Given the hawkish BOJ stance and strong economy, we see a strong case for the yen to appreciate against the dollar. Traders could consider buying USD/JPY put options to position for a downward move. These options would become profitable if the pair falls below the chosen strike price before expiration.
Strategies for Trading USD/JPY
The current US-Japan two-year bond yield spread, now around 375 basis points, has kept the pair elevated. However, a BOJ rate hike will narrow this gap, reducing the dollar’s yield advantage. We believe this spread compression supports a move for USD/JPY towards the 140.00 level.
For those looking for a different approach, selling out-of-the-money call spreads on USD/JPY could be attractive. This strategy profits if the pair trades sideways or moves lower, capitalizing on the view that upside is now limited. It allows traders to collect premium while defining their risk.
