The Japanese Yen is weakening against the US Dollar as Japan continues its expansionary fiscal policies. This is due to the government’s large-scale spending and the Bank of Japan’s reluctance to tighten monetary policy. As a result, USD/JPY is trading near 155.19, its highest in over nine months, with the recent firm dollar boosting this upward trend.
In the US, the dollar’s strength is bolstered by reduced expectations for a December interest-rate cut. Policymakers have expressed caution over easing policy due to persistent inflation risks, despite signs of a cooling labour market. The NY Empire State Manufacturing Index in November exceeded expectations at 18.7, significantly higher than the predicted 6.0 and past reading of 10.7.
Surge in Construction Spending
US Construction Spending for August also rose 0.2%, contrary to expectations of a 0.1% decline. Additionally, Fed Vice Chair Philip Jefferson’s remarks suggested a cautious stance, noting employment risks and emphasising a slow approach to rate changes. The focus is now on the September Nonfarm Payrolls report, which is delayed due to a government shutdown.
Japan’s Q3 GDP data showed a 0.4% decline QoQ and an annualised drop of 1.8%, suggesting weak domestic momentum. Overall, the US Dollar had a stronger performance against currencies like the Australian Dollar, as shown in the heat map.
The clear trend is for a higher USD/JPY, driven by the wide gap between interest rates. The Federal Reserve’s target rate is holding firm above 5%, while the Bank of Japan’s policy rate remains near zero. This fundamental difference makes holding dollars much more profitable than holding yen.
Given this upward momentum, we are looking at buying USD/JPY call options with strike prices above 156. This strategy allows us to capitalize on a continued rise while limiting our potential loss to the premium paid. It’s a defined-risk way to stay with the prevailing trend.
Key Economic Watch
The major event this week is the delayed September jobs report on Thursday. A strong number, similar to the upside surprises we saw in US data earlier in 2025, will likely validate our bullish stance and could push the pair decisively higher. However, we should expect implied volatility to be elevated ahead of the release, making options more expensive.
We must remain cautious as the pair trades above 155, a level that prompted intervention from the Japanese Ministry of Finance back in 2024. While authorities have been quiet so far, the risk of verbal warnings or direct market action to support the yen increases with every move higher. This remains the biggest risk to our long positions.
To prepare for a surprise, traders could consider buying cheap, out-of-the-money put options as a hedge. If the US jobs data comes in much weaker than expected, it could quickly reverse the dollar’s strength. A small position in puts can serve as an inexpensive insurance policy against a sharp, unexpected downturn.
