In July 2025, Japan’s Jibun Bank Services PMI increased to 53.6, marking the fastest growth in five months, up from 51.7 in June. This rise was mainly due to strong domestic demand, which helped offset a significant drop in export orders and a decline in tourist numbers. Domestic business orders grew at their fastest rate in three months. Meanwhile, export orders fell for the first time since December, decreasing at the quickest rate in over three years. This drop in exports was partly linked to low tourist numbers, which were affected by earthquake concerns in July.

Employment Level Stays Steady

Employment in the services sector remained stable, ending a 21-month streak of job growth. Companies are dealing with labor shortages and tight budgets. However, price pressures have eased. Input cost inflation is at its lowest in 17 months, and output prices are rising at the slowest pace in nine months. The Composite PMI, which includes both manufacturing and services, slightly rose to 51.6, the highest since February. While the manufacturing sector slipped into contraction, services continued to drive growth. Given this new information, we can expect continued weakness in the Japanese Yen. Easing inflation and a significant decline in export orders reduce immediate pressure on the Bank of Japan to raise interest rates, especially after it kept rates steady during its late July meeting. With the yen approaching the 165 level against the dollar, traders may want to buy USD/JPY calls to take advantage of the growing policy gap with the US Federal Reserve. The contrast between strong domestic services and a contracting manufacturing sector suggests a focused strategy for the Nikkei 225. We may see better performance in sectors like retail and real estate, which cater to the domestic market, while major exporters like automakers and electronics might struggle. This presents an opportunity for a classic pair trade: go long on domestic consumer stocks and short on industrial exporters.

Industrial Sector Weakness

The weakness in the industrial sector is not just a one-time issue. Japan’s industrial production data for June 2025, released last week, revealed a 2.5% month-on-month decline, confirming the trend seen in the PMI. The unchanged employment figure in the services sector also raises concerns that domestic growth may be slowing down. Looking back to late 2023 and early 2024, we saw a similar scenario where a weak yen did not significantly boost export volumes, despite improving corporate profits. This history suggests that the current drop in export orders is a major warning sign for the broader economy, indicating that global demand is currently more influential than currency effects. For derivatives, the key takeaway is the potential for increased volatility. The significant differences between domestic and foreign economies create uncertainty that is not fully reflected in Nikkei options yet. Using straddles or strangles might be an effective strategy to prepare for a major market move in the coming weeks without predicting specific directions. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now