If the US Treasury pushes the Bank of Japan to raise interest rates aggressively while Sanae Takaichi’s government fuels dissent within the BoJ’s policy-making ranks, breaking the USD/JPY uptrend could prove difficult. Let’s analyze the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of Japan raised its overnight rate to 1.25%.
- Dissenting Board of Governors members caused the yen to fall.
- The derivatives market does not believe the cycle will continue in October.
- Long positions can be opened with targets of 158.35 and 159.4.
Weekly Fundamental Forecast for Yen
What driver enjoys having two passengers in the back seat telling him how to drive? It’s even more frustrating when those passengers want to go in different directions. Treasury Secretary Scott Bessent is calling on the Bank of Japan to pursue aggressive monetary tightening to reverse the USD/JPY uptrend. Prime Minister Sanae Takaichi, however, opposes a sharp rate hike. Combined with rising borrowing costs, such a move could risk pushing the Japanese economy back into stagnation.
For the yen to strengthen, the market needed forceful hawkish rhetoric—not the vague signals from Kazuo Ueda, which have made it difficult to determine where the current tightening cycle might end or how quickly it will proceed. Two dissenting voices on the BoJ’s policy board have compounded the uncertainty. Speculators who had been betting on the government’s policy stance were forced to unwind their net-long positions in the Japanese yen since July 2025. As a result, the USD/JPY surged higher.
Changes in Hedge Funds’ Yen Positions
Source: Bloomberg.
The government did not even have to intervene directly in the foreign exchange market to push the US dollar to its lowest level against the yen since early February. Hedge funds were so concerned about the prospect of Japanese investors repatriating some of the more than $5 trillion they hold in foreign assets that they rushed to sell the USD/JPY. The logic was straightforward: raising the overnight rate to 1.25%—its highest level since 1995—could make domestic assets more attractive and encourage Japanese investors to bring money back home.
Foreign Assets Held by Japanese Investors
Source: Wall Street Journal.
However, for domestic investors, led by the GPIF, to repatriate their overseas holdings and strengthen the yen, the BoJ would need to pursue a transparent and aggressive tightening cycle. Instead, the central bank has acted too late and too cautiously. According to the Bank of Nassau, if the BoJ truly wanted to reverse the USD/JPY uptrend, it should have raised the overnight rate by 50 basis points rather than 25 and then followed up with aggressive currency-market intervention.
As things stand, two dissenting voices on the policy board and Kazuo Ueda’s vague rhetoric have left the derivatives market pricing in only a 20% probability of another BoJ rate hike in October. Under these circumstances, how could USD/JPY fall? Instead, the pair could come under renewed upward pressure, fueling speculation that Japan’s relatively low inflation rate means the central bank is unlikely to tighten monetary policy as aggressively as its global peers.
If that proves to be the case, UBS argues that any new government intervention in the currency market could actually become a reason to sell the yen. For hedge funds, it may be time to return to the bear camp.
Weekly USDJPY Trading Plan
Long positions opened at 154.4 and increased following the Fed and Bank of Japan meetings appear to have been well timed. Pullbacks could provide opportunities to add to long positions on the USD/JPY, with targets at 158.35 and 159.4.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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