Uchida comments on Japan’s moderate economic recovery, noting high uncertainty and inflation risks.

    by VT Markets
    /
    Jul 23, 2025
    Japan’s economy is slowly recovering, but some issues remain. Economic growth may slow because of trade policies and other concerns, especially as uncertainty continues. To support the economy, keeping a loose monetary policy is important. Whether interest rates will rise depends on actual economic improvement and inflation forecasts. In the short term, Japan’s economic growth might slow, and inflation is expected to be weak.

    Economic Uncertainties And Inflation

    Uncertainties in the economy pose risks to inflation. Rising costs, especially in food, are pushing inflation higher. Japan faces significant uncertainty, with more risks pointing downwards. Comments from the Bank of Japan’s Deputy Governor indicate a cautious stance, suggesting the central bank will likely keep its loose policy. Persistent inflation driven by food costs affects expectations for interest rate hikes. The yen is under pressure, while Japanese government bonds are supported due to the dovish outlook. Although the US and Japan have reached a trade deal, many details are still unclear. The Bank of Japan is closely monitoring economic conditions without preconceived notions, evaluating whether the economy meets their forecasts. Given Mr. Uchida’s cautious tone, we believe the Bank of Japan will not raise interest rates anytime soon. This means the gap between interest rates in Japan and the United States is likely to stay the same or even grow. This difference in policies will be a key driver of our trading strategies in the upcoming weeks.

    Japanese Yen And Export Market

    This situation strongly indicates that the Japanese Yen will remain weak. The USD/JPY exchange rate recently hit a 34-year high above 160, and we don’t see this trend reversing due to the fundamental policy differences. We are looking for chances to benefit from a consistently weak local currency. A declining yen helps Japan’s export-focused companies by making their products cheaper for foreign buyers and increasing the value of international earnings. The Nikkei 225 reached record levels earlier this year largely due to the effects of this currency decline. We believe taking long positions in Japanese equity index futures makes sense. Concerns about the economy are backed by hard data. Japan’s GDP fell by an annualized 2.0% in the first quarter of 2024, confirming the weaknesses mentioned. While overall inflation is at 2.5%, the Bank recognizes it as “cost-push,” giving them no reason to change current policies. The repeated mention of “extremely high uncertainty” signals to traders that volatility might rise. With risks “skewed to the downside,” buying options on currency pairs like USD/JPY could be a smart move to profit from large price changes. This acts as protection against the instability forecasted. The central bank’s commitment to maintaining a loose policy suggests it will also keep government bond yields low, supporting the prices of Japanese Government Bonds (JGB). A straightforward strategy would be to hold long positions in JGB futures, aligning directly with the bank’s policies. Create your live VT Markets account and start trading now.

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