Insights 
VT 
The USD/JPY pair dropped to approximately 152.15, reflecting a 0.47% decrease, as the Japanese Yen demonstrated strong performance. This decline was linked to advancements in US-Japan trade relations, following announcements on investment and strategic cooperation between the two nations.
Japan’s recent $550 billion investment plan, targeting areas such as energy and infrastructure in the US, is part of this strategy. An agreement on minerals and rare earths was also signed to secure supply lines and lessen reliance on China. Japan’s Economy Minister indicated the need for stable exchange rates due to potential impacts on households and businesses.
Bank Of Japan’s Monetary Policy
The Bank of Japan (BoJ) is anticipated to maintain its benchmark rate at 0.50% in its upcoming policy decision. Conversely, the Federal Reserve is expected to reduce rates by 25 basis points, potentially putting more pressure on the US Dollar.
Meanwhile, political instability in the US due to the government shutdown and critiques of the Federal Reserve Chair have affected sentiment. In this context, the US Dollar remains vulnerable, whereas the Yen is supported by diplomatic achievements and the BoJ’s approach. Overall, the market is in flux as currency valuations shift amidst global developments.
Given the sharp drop in USD/JPY, we see the market reacting to a clear policy divergence. The Federal Reserve is signaling a rate cut this week, which is supported by the most recent US Core PCE inflation data for September 2025 coming in at 2.5%, nearing the Fed’s target. This monetary easing contrasts sharply with the Bank of Japan, which is expected to hold its rate steady, strengthening the Yen by comparison.
The renewed diplomatic and trade relationship is providing fundamental support for the Yen. Japan’s significant investment plans in the US, particularly in strategic sectors, reduces geopolitical risk and strengthens its economic standing. This is a change from the tensions we saw just a few years ago and gives traders a solid reason to be bullish on the JPY itself, not just as a safe-haven asset.
Political Factors Impact On US Dollar
On the other side of the pair, persistent political noise from Washington is weighing on the US Dollar. We have seen this playbook before; looking back at the US government shutdown in late 2018, the Dollar Index (DXY) saw a nearly 2% drop over the following month. This historical precedent suggests the current shutdown could continue to undermine confidence in the Dollar for weeks to come.
For derivative traders, this environment points towards shorting USD/JPY. Buying put options on the pair offers a way to capitalize on further downside while defining your maximum risk ahead of the central bank meetings. Implied volatility is elevated, but the strong directional momentum driven by both monetary policy and political factors could justify the premium.
We must also consider the unwinding of the carry trade, which has been profitable for years. As the interest rate differential between the US and Japan narrows with this Fed cut, holding long USD/JPY positions becomes less attractive. This forces liquidation of those positions, which adds further downward pressure on the currency pair.
