Takuji Aida, an economic adviser to Japan’s Prime Minister, advised against the Bank of Japan (BoJ) raising interest rates in December, suggesting January would be more suitable if economic growth is anticipated for fiscal 2026.

The USD/JPY was trading 0.33% higher at 153.93, supported by a risk-on market sentiment.

Bank Of Japan’s Monetary Policy

The Bank of Japan, Japan’s central bank, sets monetary policy to ensure price stability, aiming for around a 2% inflation rate. Since 2013, it has pursued an ultra-loose monetary policy, using Quantitative and Qualitative Easing (QQE) to stimulate the economy.

This involved introducing negative interest rates in 2016 and controlling 10-year government bond yields. In March 2024, the BoJ increased interest rates, marking a retreat from this approach.

The BoJ’s policies led to the Yen’s depreciation against other currencies due to contrasting policies by other central banks, which raised rates to combat high inflation levels. This depreciation trend started reversing in 2024 when the BoJ moved away from its ultra-loose policy.

The need to unwind this policy was partly driven by a weakened Yen and global energy price hikes, contributing to inflation above the BoJ’s target, with rising domestic salaries further influencing this decision.

With suggestions that the Bank of Japan could delay its next rate hike until January 2026, a December move now appears less certain. We see the market already pricing this in, with the yen weakening and USD/JPY climbing to 153.93. This shift in expectations is the key factor for us to consider over the next few weeks.

FX Derivatives Strategy

This cautious stance from policymakers seems justified by the latest data we’ve seen. Japan’s nationwide core inflation for October 2025 cooled to 2.7%, and preliminary reports on autumn wage negotiations suggest more moderate increases than the aggressive hikes seen earlier in the year. This gives the central bank a valid reason to wait and gather more information before tightening policy further.

For those of us trading FX derivatives, this points toward continued yen weakness in the short term. It may be prudent to consider call options on USD/JPY expiring in late December or early January to capitalize on the widening interest rate differential. The chance of a “dovish hold” from the BoJ next month could provide a clear tailwind for this position.

We remember the historic policy shift back in March 2024 which ended eight years of negative interest rates, but the path to normalization has been gradual. The current USD/JPY level is still below the 160 mark where we saw significant government intervention in late 2024. This suggests there might be more room for the pair to rise before authorities step in.

This scenario is also supportive for Japanese equities, as a weaker yen boosts the overseas profits of Japan’s major exporters. Therefore, we should look at call options or long futures positions on the Nikkei 225 index. The combination of a favorable exchange rate and continued low domestic borrowing costs could fuel a year-end rally.

This strategy is reinforced by the policy divergence with the United States, where the Federal Reserve has signaled rates will remain elevated into 2026. As of its last meeting, the Fed funds rate target is holding at 5.25-5.50%, creating a significant yield advantage for the dollar. This fundamental backdrop supports a bullish view on USD/JPY and, by extension, Japanese stocks.

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