Insights 
VT 
Japan’s Prime Minister, Sanae Takaichi, is slated to deliver a policy speech revealing the government’s intention to advance the goal of increasing defence spending to 2% of GDP by 2027-2028.
In this context, the USD/JPY pair has seen a minor decrease, trading near 151.80, even though the US Dollar Index is on an upward trend, indicating a slight rise in the Japanese Yen’s strength.
Currency Movements
A table depicts the percentage changes in the Japanese Yen (JPY) against major world currencies, showing that the yen was most robust against the British Pound today.
The heat map allows for easy comparison of percentage changes between currencies, with the base currency taken from the left column and the quote currency from the top row, illustrating movements such as the JPY/USD change.
Author Sagar Dua has been engaged with financial markets since college, where he pursued a post-graduate degree in Commerce in 2014.
A legal disclaimer advises the quick-paced nature of markets and notes the forward-looking risks in the information provided, recommending thorough research for investment decisions.
Japan’s new government is signalling a major shift by accelerating its defense spending plans. This move towards fiscal expansion is inherently inflationary, creating a new dynamic for the Japanese Yen. We must now seriously consider the possibility that this spending will force the Bank of Japan’s hand.
Impact on the Yen
This comes when underlying price pressures are already present, as Japan’s core inflation has remained above the central bank’s 2% target for over a year, with September 2025’s reading at 2.5%. The Bank of Japan has so far resisted significant policy tightening, keeping its key interest rate at just 0.1%. This new fiscal push could be the final factor that prompts a more meaningful policy change.
We are currently trading near the 151.80 level in USD/JPY, which is close to the multi-decade highs seen back in 2022 and 2023 that previously triggered currency intervention. This new domestic catalyst could provide a fundamental reason for a sustained reversal from these historically weak Yen levels. Therefore, positioning for Yen strength appears more compelling now than it has in recent years.
For the coming weeks, we should look at buying put options on the USD/JPY pair. This allows us to position for a drop in the exchange rate, and therefore a stronger Yen, while strictly limiting our potential loss to the premium paid. This is a prudent way to trade a potential turning point that carries significant policy uncertainty.
The larger bond issuance required to fund this spending will also put upward pressure on Japanese government bond yields. This tension between fiscal and monetary policy is likely to increase currency volatility. As a result, purchasing JPY call options or establishing long volatility positions could also prove profitable.
