Insights 
VT 
The Bank of Japan’s (BoJ) board member Naoki Tamura suggested that the central bank should move interest rates toward neutral levels. Japan’s economy is predicted to grow, coinciding with a moderate expansion in global economies.
There is no need for a sharp rate increase or tightened monetary policy due to both upward and downward risks. Inflation could increase beyond expectations, requiring the BoJ to adjust rates to prevent future abrupt hikes.
Rising Inflation Risks
Inflation risks are rising in Japan, with many companies maintaining their investment approach. The increase in food prices should be monitored closely. Japan’s real interest rate remains negative, with potential upward deviations in domestic price developments by July 2025.
The Japanese Yen (JPY) is influenced by various factors, including BoJ policies, bond yield differences between Japan and the US, and overall risk sentiment. The Yen often strengthens as a safe-haven investment during market stress. Recent changes in the BoJ’s ultra-loose policy have provided support to the Yen, partly due to interest rate cuts from other major central banks.
These comments from a Bank of Japan board member signal a clear path toward higher interest rates, reinforcing the hawkish sentiment we have seen building this year. The immediate drop in USD/JPY to 150.60 shows the market is taking this seriously. For derivative traders, this suggests that the era of a perpetually weak yen may be ending, requiring a strategic shift.
The underlying data supports this view, making the case for future rate hikes credible. We saw the nationwide Core CPI for September 2025 come in at 2.3%, staying above the BoJ’s 2% target for the eighteenth consecutive month. This persistent inflation gives hawkish members like Tamura the evidence they need to argue for further policy normalization.
Wage Growth and Interest Rates
Furthermore, this inflation is being supported by strong wage growth, a factor the BoJ has long awaited. The spring 2025 “shunto” wage negotiations secured an average pay increase of 4.5%, the highest we’ve seen in over three decades. This fundamental shift means we should now price in a higher probability of rate hikes at upcoming BoJ meetings.
For our strategies, this means we should expect higher volatility in yen-related pairs. One-month implied volatility on USD/JPY options, which has been hovering around 8%, is likely to trend higher as the market anticipates the BoJ’s next move. We should consider buying options to position for larger price swings, rather than just selling them for premium.
The interest rate differential that has driven the yen’s weakness is also clearly narrowing. We have watched the US 10-year Treasury yield fall to 3.8% as the Federal Reserve pivots, while the 10-year Japanese Government Bond yield has steadily climbed to 0.95% on policy normalization hopes. This shrinking gap will continue to put downward pressure on the USD/JPY pair.
Given this outlook, we should be positioning for further yen strength in the weeks ahead. Strategies like buying JPY call options or USD/JPY put options offer a defined-risk way to profit from a potential move towards 148 or lower. The key will be to time these entries around key data releases and ahead of the next BoJ policy meeting.
