In August, Japanese manufacturers felt more optimistic. The manufacturing index rose to +9 from +7 in July. This improvement marks the second straight month of rising optimism. The transport machinery sector, particularly auto manufacturing, saw the most significant gain, jumping to +25 from +9. However, this growth may decline in the coming months. The non-manufacturing index decreased to +24, down from +30, marking the first drop in five months.

Food Industry Decline

The food industry faced a major drop, falling to -25 from zero, due to rising costs for ingredients and materials. Sentiment in real estate, construction, and retail also decreased, impacted by lower store traffic and extreme heat affecting services. Looking ahead, the manufacturing index is expected to fall to +4 by November, while the non-manufacturing index is anticipated to sit at +25 at that time. The survey, conducted from July 30 to August 8, included responses from 241 out of 497 major non-financial firms. The monthly Reuters Tankan survey reflects the Bank of Japan’s tankan quarterly survey by subtracting pessimistic responses from optimistic ones. A positive index indicates more optimism. Based on data from August 12, 2025, we should approach Nikkei 225 derivatives carefully. While the manufacturing index improved, its outlook for the next three months is set to drop to +4, hinting that the current strength is delicate. This may be a good time to consider protective put options or hedge existing equity positions against a possible downturn this autumn.

Auto Sector Concerns

The rise in the auto sector may serve as a trap for traders, as a decline is forecasted. This reminds us of the supply chain disruptions between 2022 and 2024, where production gains were often short-lived. Selling out-of-the-money call options on major auto stocks might be a strategy to benefit from the peak sentiment in this sector. The drop in the non-manufacturing index, its first decrease in five months, indicates weakening domestic demand. The food industry’s decline, due to cost pressures, aligns with national data showing core inflation stubbornly near 2.3% over the past year. This ongoing pressure could weigh down the broader economy. For currency traders, this report suggests a weaker yen. The domestic economic softness offers little reason for the Bank of Japan to change its cautious monetary policy, which has been in place since ending negative rates in March 2024. This approach, alongside the U.S. Federal Reserve’s high-interest rates, should continue to support long USD/JPY positions. The mixed signals from a rising manufacturing index and a falling non-manufacturing index create uncertainty. This divergence often leads to increased market volatility. Therefore, strategies like purchasing straddles on the Nikkei 225 index could be beneficial, as they profit from significant price movement in either direction. Create your live VT Markets account and start trading now.

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