BOJ Deputy Governor Ryozo Himino emphasized the need for caution regarding future rate hikes. He mentioned it’s challenging to accurately identify the true level of underlying inflation. It’s not enough to just check if underlying inflation meets the 2% target. We also need to consider possible upsides and downsides to our economic expectations. Himino’s comments come after recent discussions. The Bank of Japan’s recent statements are shedding light on when the next rate hike might happen. The main takeaway is that if the anticipated economic damage from recent global tariffs does not show in the upcoming data, tightening policies will become easier. This gives us a clear “if-then” situation to watch over the next few weeks. This perspective is becoming more credible with the latest economic data. For example, last week’s trade data revealed that exports are holding up better than expected despite rising US-China trade tensions earlier in 2025. Additionally, August’s core CPI data was stubbornly at 2.6%. If this trend continues, the BOJ’s reason for delaying action—waiting to see tariff impacts—will weaken considerably. For derivative traders, this indicates a chance to position for a stronger yen, as the market is undervaluing the potential for a rate hike this year. We suggest buying JPY call options set for November and December. This approach allows us to benefit from a potential surprise in policy, while minimizing risks if the BOJ chooses to stay put. In interest rate markets, we are looking to pay fixed on short-term yen interest rate swaps. The Overnight Index Swaps (OIS) market is currently predicting only a 30% chance of a 10-basis-point hike by December, which we believe is too low considering the new data. This position will gain if expectations for a rate hike rise in the weeks ahead. We need to remember how cautiously the BOJ has acted since ending its negative interest rate policy in March 2024. While conditions for a rate increase are improving, the Bank has a pattern of waiting for strong evidence before making decisions. Thus, any trading positions should be prepared for possible delays from the central bank.

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