Insights 
VT 
Monetary Policy Divergence
The Japanese Yen remains under pressure after Sanae Takaichi, a proponent of loose monetary policy, won the Liberal Democratic Party leadership, positioning her to become Japan’s first female Prime Minister. This result leads to expectations that the Bank of Japan may avoid further monetary tightening, affecting the Yen’s strength.
The Yen’s weakening boosts the US Dollar, pushing the USD/JPY pair closer to the 150.00 mark, the highest since August. However, concerns about a potential US government shutdown and expectations of US Fed rate cuts limit the USD’s gains relative to the Yen.
The BoJ Governor maintains the possibility of raising rates if economic conditions align, offering some support to the Yen despite broader pressure. The divergence in monetary policy expectations between the US Fed and BoJ continues to influence currency dynamics.
Technical signals suggest further USD/JPY appreciation, with a potential move towards the 151.00 level. Conversely, a drop below immediate support at 149.40 might present buying opportunities, although a deeper decline would favour bearish trends. The fluctuating risk sentiment and forthcoming economic data releases play crucial roles in shaping USD/JPY movements.
With Sanae Takaichi’s recent victory in the LDP leadership race, we see the Japanese Yen remaining under significant pressure. Her preference for continued loose monetary policy clashes directly with the Bank of Japan’s recent hawkish signals. This political development delays market expectations for a rate hike, making it cheaper to borrow Yen and sell it against other currencies.
US Economic Influence
This policy divergence is creating a clear trend, especially as Japan’s stock market cheers the prospect of more stimulus. The Nikkei 225 has surged over 25% year-to-date in 2025, fueled by a weak yen that boosts exporter profits. Despite Japan’s core inflation recently printing at 2.8% for September 2025, Takaichi’s stance suggests the BoJ will be politically constrained from tightening policy in the near term.
For derivative traders, this outlook supports positioning for further Yen weakness, particularly against the US Dollar. Buying USD/JPY call options with a strike price around the 151.00 or 152.00 level offers a way to profit from expected upside moves over the next few months. This strategy provides defined risk if the trend unexpectedly reverses.
However, we must consider the capping influence from the United States. The ongoing US government shutdown and growing expectations for two more Federal Reserve rate cuts before the end of 2025 are weighing on the US Dollar. This situation limits the potential for a runaway rally in the USD/JPY pair.
The economic drag from the shutdown is a real concern, with data from past events, like the one in 2018-2019, suggesting a potential hit of 0.1% to quarterly GDP for each week it lasts. Furthermore, with the latest jobs report showing US unemployment ticking up slightly to 4.1%, the case for the Fed to ease policy is strengthening. This makes holding long US Dollar positions more complex than it appears.
Given these opposing forces, a bull call spread on USD/JPY seems like a more prudent strategy than an outright long call. By buying a call option at a lower strike, such as 150.50, and simultaneously selling another call at a higher strike, like 152.50, we can lower the cost of the trade. This position profits from a moderate rise in the pair but protects against the risk of the US Dollar weakening and capping the rally.
The clear tension between Takaichi’s fiscal plans and the BoJ’s inflation mandate will likely increase currency volatility. Traders should therefore watch implied volatility levels in the options market closely. If a major policy clash seems imminent, strategies that benefit from a spike in volatility, such as a long straddle, could become attractive.
