The U.S. and Japan have made a trade deal that is larger and more complex than expected. However, UBS warns that this agreement might harm Japan’s economic growth. UBS highlights a 15% tariff that could hurt Japanese exports and corporate profits. As a result, business investment may decline, and consumer spending—both vital for Japan’s economy—could drop as well.

Impact on Japan’s GDP

According to UBS, these effects might lower Japan’s annual GDP growth by about 0.4 percentage points. Ongoing global trade uncertainties show just how delicate the recovery is. Given these challenges, UBS believes that the Bank of Japan will not raise interest rates anytime soon. They expect the central bank to keep its supportive policies in place until at least mid-2026, aiming to tighten only when a stronger recovery is visible. Based on this analysis, it seems that the Japanese yen will likely weaken in the coming weeks. The expected economic slowdown could lead the Bank of Japan to postpone any rate hikes, creating a gap in policy compared to other major central banks. This difference indicates a clear trend for currency traders. The U.S. dollar is currently near a 34-year high against the yen at 158, reinforcing this trend of a weaker yen. Although this situation raises the chance of government intervention, we view any declines in the USD/JPY pair as good buying chances. In this environment, buying call options on this currency pair becomes a wise strategy to capture potential gains while managing risk.

Forecast for Japanese Economy

The view of a weak recovery is backed by official data showing Japan’s economy shrank by an annualized 1.8% in the first quarter of 2024. This information strengthens the prediction that new trade tariffs will further hinder growth. Therefore, we expect that implied volatility on yen-related financial products will stay high, offering opportunities for traders who bet on price fluctuations. The outlook for the Nikkei 225 stock index is more complicated. A weaker yen helps Japan’s large exporters, but the economic slowdown presents a challenge for domestic demand. We believe this conflict will create uneven trading patterns, making strategies that benefit from time decay, such as selling out-of-the-money options, attractive. The expectation of continued supportive monetary policy through mid-2026 means that long-term interest rate swaps will likely reflect very low yields in Japan. This stability sharply contrasts with the uncertainty in the U.S. and Europe. Traders can use futures on Japanese Government Bonds to prepare for this extended period of low borrowing costs. Create your live VT Markets account and start trading now.

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