The Japanese government has lowered its GDP growth forecast for this fiscal year to 0.7%, down from 1.2% in January. This change is mainly due to the possibility of US tariffs affecting Japanese companies, which may make them less likely to invest. As a result, exports to the US are expected to decrease. Concerns about inflation could also hurt spending within Japan. Looking ahead to the next fiscal year, the government believes the economy will continue to recover, driven by domestic demand. They expect wage growth to outpace inflation, boosting private consumption. Because of this, they predict GDP growth will rise to 0.9% next year.

Growth Forecast Downgrade

Reducing the growth forecast to 0.7% indicates a challenging short-term environment for Japan’s economy. This suggests that we should prepare for more weakness in Japanese assets in the coming weeks, impacting the yen and major stock indices. A significant factor in this downgrade is sluggish consumer spending, which is not likely to improve soon. Japan’s Core CPI for July 2025 stands at 2.8%, meaning inflation remains above the Bank of Japan’s 2% goal. This ongoing pressure on household budgets restricts spending ability. The effects of US tariffs are becoming more evident in the data. Recent trade figures from July 2025 show a 4% year-over-year drop in exports to the United States. This affects major exporters in the automotive and electronics industries, which are crucial to the Japanese stock market.

Economic Strategy

This economic outlook supports the case for a weaker yen, with USD/JPY expected to stay around the 155 mark. Recall the Bank of Japan’s cautious shift away from its easy-money approach in 2024; they are unlikely to raise interest rates while the economy is under pressure. Buying call options on USD/JPY is one way to take advantage of this trend. For equity derivatives, we should expect downward pressure on the Nikkei 225 index. Slower growth and declining exports will negatively affect corporate profits and make companies less inclined to invest. Purchasing put options on the Nikkei 225 is a direct way to bet on this expected downturn. However, we should view this strategy as applicable for the coming weeks, not months. The government’s prediction of recovery next year, led by wage growth, suggests that this economic weakness may be temporary. Therefore, any bearish positions should be monitored closely for changes in market sentiment. Create your live VT Markets account and start trading now.

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