Insights 
VT 
HSBC anticipates downward pressure on the Japanese yen soon, citing U.S. monetary policy risks, domestic political uncertainties, and cautious actions from the Bank of Japan. Despite recent changes in inflation and growth forecasts potentially leading to a rate hike, the Bank of Japan may wait for the Federal Reserve’s action before proceeding with policy adjustments.
HSBC’s note to clients presents two main reasons for a pessimistic outlook on the yen: First, the USD/JPY is highly responsive to the Federal Reserve’s hawkish stance, strong U.S. economic data, and the Bank of Japan’s dovishness. These aspects have caused the yen to weaken against the U.S. dollar in recent sessions.
Impact of Japanese Government Bond Yields
Secondly, the USD/JPY is also influenced by Japanese government bond yields, which are pressured due to domestic uncertainties. Potential leadership changes within the Liberal Democratic Party and concerns about Japan’s fiscal direction could further weaken the yen if fiscal or monetary policies become more pro-easing. These factors emphasise the complicated situation facing the yen, with both global rate trends and local political risks contributing to its current vulnerability.
We see renewed downside pressure on the Japanese yen in the near term, driven by a mix of US monetary policy risks and domestic political uncertainty in Japan. The Bank of Japan is also being very careful, preferring to wait for the Federal Reserve to act first before making its own moves. This suggests the yen could get weaker before it gets stronger.
The USD/JPY exchange rate is very sensitive to strong US economic data, which has been the case recently. The July 2025 US jobs report, for example, showed non-farm payrolls adding a robust 215,000 jobs, beating forecasts and reinforcing the idea that the Fed will not rush to cut interest rates. This difference in policy between a firm Fed and a hesitant BoJ continues to push the yen down.
We are also watching Japanese government bond yields, which are under pressure due to uncertainty around the upcoming Liberal Democratic Party leadership election in September. The 10-year JGB yield is currently hovering around 0.95%, reflecting worries that new leaders might favor policies that weaken the yen further. This is a continuation of the cautious path we saw when the BoJ delivered its first small rate hike back in March 2024 after 17 years.
Opportunities and Risks for Derivative Traders
For derivative traders, this outlook suggests that buying call options on USD/JPY could be a useful strategy to position for more yen weakness. This would allow traders to profit if the dollar strengthens against the yen, as the pair tests the 160 level again. The current market also presents opportunities for strategies that benefit from rising volatility.
However, any positions should be managed with caution as we approach the autumn. There is a possibility of a 25 basis point rate hike from the Bank of Japan in its October meeting. Any surprisingly decisive action from the BoJ could cause a sharp reversal in the yen’s direction.
