Insights 
VT 
Japan’s Prime Minister Sanae Takaichi announced plans to review the fiscal target of achieving a basic balance surplus. Instructions for this will be issued in January. The government aims to restore market trust in Japan’s finances while boosting investment for economic growth. A sales tax cut is not ruled out, but the immediate focus is on addressing rising living costs.
The USD/JPY pair currently stands at 153.82, down by 0.26%. The Bank of Japan (BoJ), the central bank, sets monetary policy to ensure price stability with an inflation target of around 2%. Since 2013, the BoJ’s policy has been ultra-loose, involving measures like Quantitative and Qualitative Easing. However, in March 2024, the BoJ lifted interest rates, signaling a move away from its previous stance.
The Yens Depreciation
The BoJ’s stimulus measures led to the Yen’s depreciation against major currencies, a trend worsened by policy divergence with other central banks. In 2024, the BoJ began unwinding its policy due to inflation exceeding its target, driven by a weaker Yen and rising global energy prices. Expectations of rising salaries further influenced their decision.
With the government now signaling a review of its fiscal targets for January, we are facing a new wave of uncertainty for the Japanese Yen. This talk of changing spending and debt goals comes on top of the Bank of Japan’s slow move away from its ultra-loose policy. Derivative traders should prepare for increased volatility as the market tries to figure out if fiscal and monetary policy will work together or against each other.
We’ve been watching the Bank of Japan carefully since its landmark policy shift back in March 2024, which ended negative interest rates. The central bank has been trying to normalize policy very cautiously, but the government’s new fiscal direction could complicate things significantly. If the government decides on more spending or tax cuts, it could fuel inflation and force the BoJ to hike rates faster than anticipated.
Looking at the numbers, we see that core inflation for October 2025 came in at 2.6%, staying stubbornly above the BoJ’s 2% target. Meanwhile, the BoJ’s policy rate is only at 0.25%, showing how little room they have to maneuver. These new fiscal discussions add a major variable that could either help tame inflation or make it worse.
Market Uncertainty and Strategies
This uncertainty leading up to the January announcement makes options strategies particularly relevant. We should consider buying volatility through instruments like straddles on USD/JPY, which would profit from a large price swing in either direction. Implied volatility for contracts expiring in February 2026 will likely start to rise as traders price in this event risk.
We all remember the dramatic Yen weakness we saw through 2022 and 2023 when the policy gap with other central banks was massive. Now, the key driver is shifting from just monetary policy to the interplay between the BoJ and the government’s budget plans. This creates a more complex environment than the one-way trade we saw in previous years.
The mention of a potential sales tax cut, even as a distant option, is something we must watch closely. Any serious move in that direction would be seen as inflationary and likely weaken the Yen, pushing USD/JPY back towards the 160 level seen in late 2024. For now, the pair’s small dip to 153.82 seems like a cautious reaction, but the bigger move will come once the government’s true intentions become clearer.
