Insights 
VT 
The Japanese Yen (JPY) remains pressured against the US Dollar (USD), with USD/JPY near nine-month highs around 154.64. This comes despite the Greenback being broadly softer. Japan’s fiscal stance and the Bank of Japan’s cautious approach to policy normalization contribute to this pressure.
Fiscal Measures And Policy Caution
Prime Minister Sanae Takaichi supports using expansive fiscal measures to aid Japan’s fragile recovery. Private-sector members recommend a supplementary budget over ¥14 trillion due to slowing domestic demand and weak wage growth. Takaichi emphasises policy caution to prevent sliding back into deflation, potentially harming consumption and investment.
Japanese officials express concern over the Yen’s weakness yet suggest no immediate action. Finance Minister Satsuki Katayama states the government is monitoring exchange moves with urgency, including speculative fluctuations. In the US, focus is on the House vote to end the government shutdown.
Though the move aimed at reopening the US government briefly supported the Greenback, the effect faded with expectations of a Federal Reserve rate cut in December. A Reuters poll found 84 of 105 economists anticipate a 25 basis point rate cut by the Fed. Currency changes show the US Dollar as strongest against the Yen, yet fluctuated slightly against other major currencies.
The widening policy gap between a dovish Federal Reserve and an even more cautious Bank of Japan continues to drive this market. We see the Fed is widely expected to cut rates in December, with the CME FedWatch Tool now indicating a 92% probability of a 25-basis-point reduction. This divergence is fueling the carry trade, making it attractive to be long USD/JPY, but the high levels are causing significant tension.
The primary risk to holding a long position is an intervention from the Japanese government, as verbal warnings are already increasing. We remember the sharp, sudden drops in USD/JPY back in 2022 and 2024 when the Ministry of Finance stepped in to defend the yen around similar levels. The current “high sense of urgency” from officials suggests that while the underlying trend is up, the downside risk is abrupt and substantial.
Traders’ Considerations In The Current Climate
Given this risk, we believe traders should look at options to express a bullish view rather than holding spot positions with unlimited downside. Buying USD/JPY call options, for instance a January 2026 156-strike, would allow participation in further upside while defining the maximum loss to the premium paid. This strategy protects capital from a sudden, multi-yen plunge triggered by intervention.
The market is clearly pricing in a larger move, as one-month implied volatility for USD/JPY has climbed to 11.5% from around 8% just last month. For those uncertain of the direction but confident in a large price swing, a long straddle could be effective. This would profit from either a surge past 155 or a sharp reversal back towards 150.
The fundamental weakness of the yen is unlikely to change in the short term, especially with the government planning another large supplementary budget. Recent data showing Japan’s Q3 GDP contracted by 0.2% only adds pressure on policymakers to maintain their supportive stances. This reinforces the core reason for the yen’s slide and suggests the upward pressure on USD/JPY will persist until a catalyst like intervention breaks the trend.
