OCBC strategists Sim Moh Siong and Christopher Wong report that the Japanese government bond (JGB) yield curve has steepened since the energy shock linked to the US–Iran war. They say this has raised questions about Bank of Japan (BoJ) policy credibility, contrasting with JGB curve flattening seen across other G10 markets after February.
They expect the BoJ to raise rates by 25 bp on 28 April, though market pricing still allows for a hawkish hold. They add that concern is growing that the BoJ is not keeping pace with current conditions, which increases pressure for a move in April.
They warn that if the BoJ does not hike, USD/JPY could rise into the 160s. They say this could lead the Ministry of Finance to intervene, aiming to bring the pair back towards 155.
They also reference recent messaging from Finance Minister Katayama as indicating readiness to act. They keep an end-2026 USD/JPY target of 155.
The Bank of Japan is facing a growing credibility challenge, as the sharp steepening in the JGB curve shows. Following the energy shock from the US-Iran war, the spread between Japan’s 2- and 10-year government bonds has widened to over 120 basis points, a stark contrast to the curve flattening we saw across other major economies in late 2025. This signals that the market believes the BoJ is not acting fast enough to control inflation.
With the crucial policy meeting on April 28 just days away, traders should prepare for a significant spike in currency volatility. One-week implied volatility for USD/JPY has already surged to 16%, well above the year’s average, reflecting the market’s nervousness about a binary outcome. A straddle or strangle option strategy could be effective, as it profits from a large price movement in either direction without betting on the specific outcome of the meeting.
If the BoJ fails to deliver the expected 25 basis point hike, we could see USD/JPY quickly push into the 160-162 range. Traders might consider buying short-dated call options with strike prices around 159 to capitalize on this potential overshoot. This “hawkish hold” scenario would be interpreted as a policy failure, likely triggering a rapid sell-off in the yen.
However, any move above 160 would almost certainly trigger intervention from the Ministry of Finance. We saw forceful action back in 2022 when the ministry spent over ¥9 trillion to defend the yen as it approached 152. Recent warnings from Finance Minister Katayama suggest a similar playbook, creating a significant risk that any gains on USD/JPY call options could be abruptly erased as the pair is pushed back toward 155.
Alternatively, if the BoJ follows through with a 25 basis point hike, the yen is likely to strengthen immediately. In this case, USD/JPY put options would be the appropriate tool, with traders targeting a move back towards the 155 level. This outcome would help restore some of the central bank’s damaged credibility.
Even with a potential rate hike, we remain cautious on the yen’s long-term prospects. Our end-of-year target for USD/JPY remains at 155, suggesting that any post-hike yen strength may be limited. This implies that selling longer-dated yen calls on dips in the currency pair could be a prudent strategy over the coming months.
