In July, Tokyo’s core inflation exceeded the Bank of Japan’s 2% target. This raises the likelihood of a rate hike either later this year or early next year. The Core Consumer Price Index (CPI), which excludes fresh food, rose by 2.9% compared to the previous year in July. This was slightly below the expected 3.0% and down from June’s 3.1%.

Core Core Inflation Rate

The core-core inflation rate, which removes both fresh food and fuel prices, remained steady at 3.1% year-on-year. The Bank of Japan closely watches this measure to understand domestic price trends. This data will impact the Bank of Japan’s policy meeting on July 30–31. While there may be expectations for an increase in the inflation forecast, it is likely that interest rates will stay where they are for now. According to analysis from Sheridan, the ongoing inflation signals traders to prepare for changes in the near future. The Bank of Japan may adopt a more hawkish approach, which changes the risk outlook for yen-denominated assets. Traders should be ready for potential policy changes that could happen sooner than expected.

Impact On The Yen And Bonds

The yen is notably weak, with the USD/JPY exchange rate recently reaching 34-year highs around 160. Given the inflation situation, traders might consider buying call options on the yen. This strategy allows for profit if the central bank adopts a more aggressive tone in its July meeting, while also limiting downside risk. The expectation of tighter monetary policy will likely affect Japanese government bonds, indicating that yields may rise from their current levels. National core inflation was already at 2.8% in June, suggesting ongoing price pressures. Using interest rate futures could be an effective way to bet on rising bond yields ahead of the Bank of Japan’s inflation forecast update. A more hawkish stance could pose challenges for stocks, making the Nikkei 225 index potentially vulnerable. We expect increased market volatility around policy decision dates. Buying put options on the Nikkei 225 can be a strategic hedge or a direct bet on a market drop due to higher borrowing costs. We also need to remember how the market reacted after the historic rate hike in March 2024, when the yen unexpectedly weakened. This occurred because the policy guidance was perceived as too cautious, fitting the “buy the rumor, sell the fact” pattern. Therefore, any derivative positions should be prepared to handle possible short-term volatility if the Bank of Japan’s message falls short of hawkish expectations. Create your live VT Markets account and start trading now.

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