Japan’s National Consumer Price Index (CPI) increased by 2.9% year-on-year in September, up from 2.7% in the previous period. The nation’s CPI excluding fresh food also rose 2.9% year-on-year, meeting market expectations.

When excluding fresh food and energy, the National CPI rose 3.0% year-on-year in September, compared to a previous 3.3%. Following the CPI data release, the USD/JPY currency pair rose by 0.45%, trading at 152.65.

The Japanese Yen

The Japanese Yen is one of the most traded currencies worldwide. Its value depends on Japan’s economic performance, the Bank of Japan’s policies, differences in Japanese and US bond yields, and market risk sentiment.

The Bank of Japan (BoJ) influences the Yen through currency policies and interventions. Its ultra-loose monetary policy between 2013 and 2024 led the Yen to depreciate, but recent policy changes have supported the Yen.

Differences in Japanese and US bond yields impact the Yen. The BoJ’s previous ultra-loose policies widened this difference, favouring the US Dollar, but recent policy adjustments are narrowing this gap.

In times of global financial stress, the Yen attracts as a safe-haven investment. Turbulence tends to increase the Yen’s value compared to other currencies viewed as riskier.

Market Response

With the latest September inflation data now in hand, we see a mixed picture for Japan. While the headline number rose, the core inflation figure that excludes both food and energy has actually softened. This detail is crucial because it gives the Bank of Japan (BoJ) a reason to avoid aggressive interest rate hikes in the coming weeks.

This puts us in a familiar, yet tense, position with USD/JPY trading at 152.65. The fundamental driver remains the wide interest rate gap between the US and Japan, a situation reinforced by strong US retail sales figures released last week on October 17, 2025, which showed a 0.9% month-over-month increase. This data supports the US Federal Reserve maintaining higher rates, continuing to favor the dollar over the yen.

However, we must be extremely cautious at these levels, as we recall Japanese authorities intervened heavily to support the yen back in late 2022 and again in 2024 when the dollar approached similar territory. The risk of sudden, sharp yen appreciation from government action is therefore very high. This makes simply shorting the yen a highly risky proposition for any trader.

Given this conflict between fundamental pressure and intervention risk, trading volatility is the most logical response. We should be looking at buying USD/JPY call options, which allow us to profit if the pair continues to climb but limit our potential loss to the premium paid if authorities do step in. This strategy allows for participation in the uptrend while hedging against a sudden policy-driven reversal.

The market is already pricing in this uncertainty, as we’ve seen 1-month implied volatility for USD/JPY options climb from 9% to over 12% since the start of October. This indicates that options are becoming more expensive, but it also confirms that a significant price move is expected. Structuring trades like call spreads can help reduce the entry cost while still positioning for further yen weakness.

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