Japan’s Prime Minister intends to bolster the economy to increase tax revenues without raising taxes. The government might revise its primary balance target to be assessed over multiple years instead of annually.
Currently, the USD/JPY pair has risen 0.07% to 154.83.
Factors Influencing The Yen
The Japanese Yen’s value is influenced by Japan’s economic performance, the Bank of Japan’s policy, the yield differential between Japanese and US bonds, and overall risk sentiment among traders.
The Bank of Japan sometimes intervenes in currency markets to influence the Yen’s value, although it often avoids frequent interventions. From 2013 to 2024, the Yen weakened due to the Bank’s ultra-loose monetary strategy, contrasting with other central banks. The recent policy shift to tighten monetary conditions has provided some support to the Yen.
The yield differential between Japanese and US bonds has historically favoured the US Dollar due to Japan’s prolonged ultra-loose monetary stance. The 2024 shift away from this strategy, paired with interest-rate cuts by other central banks, reduces this gap.
During market stress, the Japanese Yen gains strength as a safe-haven currency. This perception of stability makes it appealing during uncertain times.
Government’s Fiscal and Monetary Policies
The Prime Minister’s comments reinforce the view that fiscal policy will remain loose, aiming for growth instead of immediate budget cuts. This suggests the government will not be helping to strengthen the yen in the coming weeks. For now, this keeps the fundamental pressure on the currency.
This puts the government’s fiscal stance at odds with the Bank of Japan’s slow but steady monetary tightening that we have seen since 2024. Japan’s national core CPI for October 2025 came in at 2.7%, which was the 19th straight month above the BoJ’s 2% target, giving them a clear reason to continue. This conflict between government and central bank policy is a primary source of market uncertainty.
At the same time, the interest rate differential that has driven yen weakness is compressing. The spread between the US 10-year Treasury and the 10-year JGB has narrowed to 310 basis points, a significant tightening from the peaks over 450 we saw back in late 2023. This trend reduces the appeal of borrowing yen to invest in dollar assets.
For derivative traders, this suggests positioning for higher volatility rather than a clear directional move. With the USD/JPY pair holding at 154.83, implied volatility on 3-month options has risen to 11.2% as the market digests these conflicting signals. Strategies that can profit from sharp moves in either direction, such as long straddles, could be considered.
We must also watch for the risk of direct market intervention, especially if the currency weakens further. We remember the Ministry of Finance stepping in forcefully when the pair approached the 160 level in 2024, causing a rapid reversal. This history puts a psychological cap on USD/JPY, making it risky to hold large bets against the yen at these levels.
