USD/JPY moved back above 160, close to multi-decade highs, even as Japan’s external balance strengthened. Japan’s seasonally adjusted current account surplus rose to 4.2 trillion yen in April, the highest level since the series began in 1996, and the surplus is put at 5.6% of GDP.
The improvement reflects firmer foreign investment income alongside better trade in goods and services. Near-term moves in JPY, however, are framed as being driven less by these fundamentals and more by the Iran conflict and oil prices.
Fundamental Strength Overlooked Amid Geopolitical Risks and Carry Trade
We see the Japanese Yen as fundamentally undervalued, even with USD/JPY pushing past 164 in early June. Japan’s Ministry of Finance just confirmed a current account surplus of ¥3.8 trillion for April 2026, marking the 15th straight month of surplus. This underlying strength is being ignored by the market for now.
The primary reasons for the Yen’s weakness are the wide interest rate gap and geopolitical risks. With the US Federal Reserve holding rates at 4.75% and the Bank of Japan only at 0.25%, the carry trade is heavily weighing on the JPY. Recent tensions in the Strait of Hormuz have also pushed Brent crude oil back to $95 a barrel, further pressuring the currency of the energy-importing nation.
Positioning For a Yen Correction With Options Strategies
This creates a clear divergence that we can position for using derivatives. The market’s focus on short-term factors presents an opportunity, as any sign of easing oil prices or a policy shift could trigger a rapid JPY rally. We should therefore consider buying out-of-the-money JPY calls (or USD/JPY puts) with expirations in the next three to six months.
Implied volatility on USD/JPY options has climbed to a 12-month high of 11.5%, making outright purchases expensive. Therefore, we should look at vertical spreads to lower the entry cost and define our risk. For example, buying a USD/JPY 160/155 put spread allows us to profit from a move back towards fundamental value while capping our initial premium outlay.
We remember the sharp currency reversals of late 2023 and the interventions of 2022, which show how quickly sentiment can shift. The current situation feels stretched, and while the Yen could weaken further in the immediate term, the risk-reward for a corrective snap-back is becoming very attractive. We must be positioned for this potential turn but in a way that manages the high cost of holding options.
