Bank of Japan Deputy Governor Uchida talked about recent inflation trends and the economic outlook. He noted that medium- and long-term inflation expectations are rising but might briefly slow down before they pick up again. Uchida pointed out that consumer inflation has exceeded expectations. A broader increase in food prices suggests a shift in how companies are setting prices. He expects core consumer inflation might go below 2% next fiscal year but will likely begin to rise gradually afterward.

Interest Rate Strategy

Uchida’s comments indicate a cautious approach, with no immediate plans to raise interest rates. Expected increases may come in late 2025 or early 2026. Given the deputy governor’s remarks, we think the Bank of Japan will keep its very relaxed monetary policy for now. This continues to create a substantial interest rate gap between Japan and the United States, where the Federal Reserve’s key rate is more than five percentage points higher. Therefore, we will focus on strategies that bet on continued yen weakness. The Japanese yen is likely to face pressure against the dollar, which recently surpassed 151 yen, a level not seen in over 30 years. We see an opportunity in maintaining long positions in dollar-yen currency pairs via instruments like call options or futures. This difference in policies serves as a strong motivator for this trade.

Impact on Japanese Equities

This situation is also highly favorable for Japanese stocks, especially for exporters who benefit from the weaker yen. The Nikkei 225 index has reached a 33-year high, and we expect this upward trend to continue as corporate profits rise. Hence, holding long positions in Japanese stock index futures makes sense. Mr. Uchida’s caution is warranted, especially when examining the economic data. Japan’s real wages, adjusted for inflation, fell for the 18th month in a row in September. This indicates that domestic demand isn’t strong enough yet to support the central bank’s 2% inflation goal sustainably. This data reinforces the idea that a rate hike is still far off. The deputy governor’s clear communication helps to reduce immediate policy uncertainty, creating a suitable environment for carry trades. We will advocate for strategies that involve borrowing in yen at nearly zero interest to invest in higher-yielding foreign assets. The current stability makes this a lower-risk option than it has been in past months. Even though core consumer inflation hit 2.9% in October, Uchida’s comments suggest this is mainly due to imported costs and not from strong demand. Historically, the central bank has waited for real wage growth to lead to sustained price increases before tightening policy. We anticipate this cautious approach will guide their decisions in the coming year. Create your live VT Markets account and start trading now.

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